item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs13 consolidated statement income three years ended december 31 1993 fs14 consolidated balance sheet december 31 1993 1992 fs15 consolidated statement cash flows three years ended december 31 1993 fs16 consolidated statement stockholders equity three years ended december 31 1993 fs17 notes consolidated financial statements fs18 fs29 2 financial statement schedules report independent accountants financial statement schedules 35 schedule v property plant equipment 36 schedule vi accumulated depreciation 37 depletion amortization property plant equipment caltex group companies combined financial statements schedules c1 c21 combined financial statements schedules caltex group companies filed part report follow fiveyear financial summary page fs36 schedules omitted applicable required information included consolidated financial statements notes thereto 3 exhibits exhibit index pages 33 34 annual report form 10k lists exhibits filed part report b reports form 8k company filed reports form 8k fourth quarter 1993 march 30 1994 31 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 30th day march 1994 chevron corporation kenneth derr kenneth derr chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 30th day march 1994 principal executive officers directors kenneth derr samuel h armacost kenneth derr samuel h armacost chairman board j dennis bonney william e crain j dennis bonney william e crain vicechairman board james n sullivan sam ginn james n sullivan sam ginn vicechairman board condoleezza rice principal financial officer condoleezza rice martin r klitten bruce smart jr martin r klitten bruce smart jr vicepresident finance john young john young principal accounting officer donald g henderson george h weyerhaeuser donald g henderson george h weyerhaeuser vicepresident comptroller malcolm j mcauley malcolm j mcauley attorneyinfact 32 exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated november 23 1988 filed exhibit 31 chevron corporations annual report form 10k 1989 incorporated herein reference 32 bylaws chevron corporation amended december 7 1989 including provisions giving attorneysinfact authority sign behalf officers corporation filed exhibit 32 chevron corporations annual report form 10k 1989 incorporated herein reference 41 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated november 22 1988 incorporated herein reference 42 amendment 1 dated december 7 1989 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated december 7 1989 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective january 1 1990 filed exhibit 101 chevron corporations annual report form 10k 1990 incorporated herein reference 102 management contingent incentive plan chevron corporation amended may 2 1989 filed exhibit 102 chevron corporations annual report form 10k 1989 incorporated herein reference 103 chevron corporation excess benefit plan amended restated july 1 1990 filed exhibit 103 chevron corporations annual report form 10k 1990 incorporated herein reference 104 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 105 chevron restricted stock plan nonemployee directors amended restated effective january 29 1992 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 16 1992 incorporated herein reference 106 chevron corporation longterm incentive plan filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 19 1990 incorporated herein reference 121 definitions selected financial terms page 38 122 computation ratio earnings fixed charges page 39 221 subsidiaries chevron corporation page 40 241 consent price waterhouse page 35 242 consent kpmg peat marwick page c5 financial statements caltex group companies 33 exhibit index continued exhibit description 251 powers attorney directors certain officers chevron corporation authorizing among things signing reports behalf filed exhibit 251 chevron corporations annual report form 10k 1988 incorporated herein reference 252 power attorney certain director chevron corporation authorizing among things signing reports behalf filed exhibit 25 chevron corporations quarterly report form 10q quarter ended june 30 1989 incorporated herein reference 253 power attorney certain officer chevron corporation authorizing among things signing reports behalf filed exhibit 253 chevron corporations annual report form 10k 1989 incorporated herein reference 254 power attorney certain director chevron corporation authorizing among things signing reports behalf filed exhibit 25 chevron corporations quarterly report form 10q quarter ended june 30 1991 incorporated herein reference 255 power attorney certain director chevron corporation authorizing among things signing reports behalf filed exhibit 25 chevron corporations quarterly report form 10q quarter ended march 31 1993 incorporated herein reference copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 225 bush street san francisco california 94104 34 report independent accountants financial statement schedules board directors chevron corporation audits consolidated financial statements referred report dated february 25 1994 appearing page fs13 annual report form 10k also included audit financial statement schedules listed item 14a form 10k opinion financial statement schedules present fairly material respects information set forth therein read conjunction related consolidated financial statements price waterhouse san francisco california february 25 1994 consent independent accountants hereby consent incorporation reference prospectuses constituting part registration statements form s3 298466 form s8 nos 333899 3334039 3335283 chevron corporation incorporation reference prospectus constituting part registration statement form s3 3314307 chevron capital usa inc chevron corporation incorporation reference registration statement form s3 3358838 chevron canada finance limited chevron corporation incorporation reference prospectus constituting part registration statement form s8 290907 caltex petroleum corporation report dated february 25 1994 appearing page fs13 annual report form 10k also consent incorporation reference report financial statement schedules appears price waterhouse san francisco california march 30 1994 35 schedule v property plant equipment including capital leases millions dollars 36 schedule vi accumulated depreciation depletion amortization property plant equipment including capital leases 1 millions dollars 37 exhibit 121 definitions selected financial terms return average stockholders equity net income divided average stockholders equity average stockholders equity computed averaging sum beginning year end year balances return average capital employed net income plus aftertax interest expense divided average capital employed capital employed stockholders equity plus shortterm debt plus longterm debt plus capital lease obligations plus minority interests average capital employed computed averaging sum capital employed beginning year end year total debttototal debt plus equity ratio total debt including capital lease obligations divided total debt plus stockholders equity current ratio current assets divided current liabilities interest coverage ratio income tax expense cumulative effect change accounting principle plus interest debt expense amortization capitalized interest divided beforetax interest costs 38 exhibit 122 chevron corporation total enterprise basis computation ratio earnings fixed charges dollars millions year ended december 31 1993 19921 1991 1990 1989 net income cumulative effect changes accounting principles 1265 2210 1293 2157 251 income tax expense 1389 1508 1302 2387 1322 distributions greater less equity earnings less 50 owned affiliates 6 9 20 6 9 minority interest 2 6 3 previously capitalized interest charged earnings period 20 18 17 15 interest debt expense 390 490 585 707 718 interest portion rentals 2 169 152 153 163 118 earnings provision taxes fixed charges 3237 4371 3332 5429 2418 interest debt expense 390 490 585 707 718 interest portion rentals 2 169 152 153 163 118 capitalized interest 60 46 30 24 42 total fixed charges 619 688 768 894 878 ratio earnings fixed charges 523 635 434 607 275 1 information 1992 reflects companys adoption financial accounting standards board statements 106 employers accounting postretirement benefits pensions 109 accounting income taxes effective january 1 1992 2 calculated onethird rentals 39 exhibit 221 subsidiaries chevron corporation name subsidiary state country reported principal area operation organized united states chevron usa inc pennsylvania principal divisions chevron usa production company chevron usa products company warren petroleum company chevron capital usa inc delaware chevron chemical company delaware chevron investment management company delaware chevron land development company delaware chevron oil finance company delaware chevron pipe line company delaware huntington beach company california pittsburg midway coal mining co missouri international bermaco insurance company limited bermuda cabinda gulf oil company limited bermuda chevron asiatic limited delaware chevron canada limited canada chevron canada enterprises limited canada chevron canada resources canada chevron international limited liberia chevron international oil company inc delaware chevron niugini pty limited papua new guinea chevron overseas petroleum inc delaware chevron standard limited delaware chevron uk limited united kingdom chevron transport corporation liberia chevron nigeria limited nigeria gulf oil great britain limited united kingdom insco limited bermuda transocean chevron company delaware subsidiaries list wholly owned either directly indirectly chevron corporation certain subsidiaries listed since considered aggregate single subsidiary would constitute significant subsidiary december 31 1993 40 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs1 fs12 quarterly results stock market data fs12 report management fs13 report independent accountants fs13 consolidated statement income fs14 consolidated balance sheet fs15 consolidated statement cash flows fs16 consolidated statement stockholders equity fs17 notes consolidated financial statements fs18 fs29 supplemental information oil gas producing activities fs30 fs35 fiveyear financial summary fs36 41 managements discussion analysis financial condition results operations key financial results millions dollars except pershare amounts 1993 1992 1991 sales operating revenues 36191 38212 38118 income cumulative effect changes accounting principles 1265 2210 1293 cumulative effect changes accounting principles 641 net income 1265 1569 1293 special charges credits included income 883 651 66 per share income cumulative effect changes accounting principles 389 652 369 net income 389 463 369 dividends 350 330 325 cumulative effect changes accounting principles chevrons worldwide net income 1993 1265 billion 19 2 percent 1992 1991 respectively however special items years cumulative effect adopting two new accounting standards 1992 affected comparability companys reported results special items related tax effects decreased 1993 earnings 883 million increased 1992 earnings 651 million decreased 1991 earnings 66 million also cumulative effect adopting two new accounting standards reduced 1992 earnings 641 million excluding effects special items accounting changes 1993 earnings 2148 billion 38 percent 1559 billion 1992 increased 58 percent 1359 billion 1991 operating environment outlook crude oil prices began trending downward midyear decline accelerated last two months 1993 prices reaching lowest level five years yearend year chevrons posted price west texas intermediate wti benchmark crude declined 550 per barrel 1325 yearend 1993 worldwide demand crude oil dampened weak global economy production nonopec countries increased particularly north sea opec producers adjusted production levels accordingly hand natural gas prices united states remained strong 1993 companys average realization 199 per thousand cubic feet nearly 30 cents higher 1992 1993 refined product prices decline quickly crude oil prices resulting strong worldwide sales margins however late year decline accelerated united states product prices remained lower levels early 1994 economic indicators show evidence us economy improving however recessionary conditions continue major countries bitter cold weather us midwest east strengthened crude oil prices somewhat early 1994 february 25 chevrons posted price wti fallen back yearend 1993 level natural gas prices remained firm average us natural gas realizations january 1994 203 per thousand cubic feet crude oil refined product prices continue low levels companys earnings ongoing operations may negatively affected widely fluctuating prices become characteristic petroleum industry past several years company made significant progress streamlining businesses reducing costs recent years believes improved ability operate competitively profitably yearend 1993 marked end fiveyear period aggressive management performance objectives set early 1989 company declared mission provide superior financial results companys stockholders objective set higher total stockholder return stock appreciation plus reinvested dividends five major us oil companies company measures performance achieve company embarked upon aggressive program restructure businesses improve management decision making accountability shed marginal noncore assets reduce operating costs improve work processes selective investments position company longterm growth 19891993 period chevrons total annual stockholder return averaged 189 percent best among peer group company disposed marginal noncore assets generating almost 4 billion cash proceeds period reduced annual cost structure 1 billion 1993 fs1 1991 levels using companys method measuring cost performance costs reduced 745 per barrel 1991 651 1993 reduction 94 per barrel nearly 13 percent early 1994 company announced new fiveyear goal maintaining position 1 major us oil company total stockholder return key elements include targeting 25 per barrel reduction operating administrative costs end 1994 attaining 12 percent return capital employed adjusting special items pursuing growth opportunities particularly international exploration production caltex affiliate refining marketing activities fast growing asiapacific region united states refining marketing developments company announced major restructuring us refining marketing business may 1993 companys refineries port arthur texas philadelphia pennsylvania sold investments retail marketing activities east concentrated gulf coast states result companys us refining capacity decrease 350000 barrels per day 25 percent us refined product sales volumes may decline 250000 barrels per day 17 percent 1993 volumes however new refining organization smaller expected efficient improved cash flow return capital employed also eliminate large capital investments would required facilities clean air act environmental regulations provision 543 million recorded financial effects restructuring late february 1994 company signed letter intent sell philadelphia refinery sun company inc negotiations refinery sales ongoing expected reserve sufficient complete restructuring united states exploration production developments interim tankering permit issued california coastal commission required point arguello partners signed agreement february 1 1994 would allow pipeline developer secure financing construction pipeline los angeles area ongoing negotiations deadline met tankering suspended tankering project producing 80000 barrels per day partners thus far maintained production volumes routing oil alternate markets pending resolution negotiations resumption tankering chevron operator owns approximately 25 percent project international exploration production developments tengizchevroil tco companys joint venture republic kazakhstan develop tengiz korolev oil fields northeastern coast caspian sea began operations april 1993 oil exported world markets transportationexchange agreement russia whereby tco receives exports crude oil russia exchange providing russia comparable amounts tengiz crude natural gas natural gas liquids sulfur sold local markets upon formation joint venture chevrons net proved reserves crude oil natural gas liquids increased 11 billion barrels net proved reserves natural gas increased 15 trillion cubic feet representing companys share tcos current net proved reserves crude oil production capacity 65000 barrels per day however pipeline transportation constraints production averaged approximately 30000 barrels per day since april yearend 1993 companys cash investment tco 220 million addition company accrued future field development obligations amounts payable completion demonstrated operability export pipeline system next three five years plans call tco spend 15 billion reach production capacity 260000 barrels per day late 1990s current capacity expected double 130000 barrels per day 1995 pace field development 130000 260000 barrels per day dependent ability export full production capacity ultimately require construction export pipeline system separate tco joint ventures tengiz development project negotiations agree terms pipeline project proved difficult currently impossible predict eventual outcome impact joint venture january 1994 production began alba oil field united kingdom north sea chevron operator owns onethird project production peak 70000 barrels per day later 1994 fs2 chevron significant oil gas exploration production operations nigeria angolan exclave cabinda share net production 100000 barrels crude oil per day countries angola experienced civil unrest following 1992 elections separately elements seeking independence cabinda angola periodically created civil unrest area companys operations also nullification nigerian elections 1993 followed period political uncertainty date none events significant impact companys operations company closely monitoring developments environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern manner company conducts operations also products sells costs complying myriad laws regulations pertaining operations products embedded normal costs conducting business using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1993 nearly 15 billion 675 million capital expenditures amounts include noncash provisions recorded environmental remediation programs include spending charged reserves addition various federal state local environmental laws regulations governing ongoing operations products company well companies engaged petroleum chemicals industries required incur expenses corrective actions various facilities waste disposal sites obligation take remedial action may incurred result enactment laws federal superfund law issuance new regulations result accidental leaks spills ordinary course business addition obligation may arise facility closed sold expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable regulations existing time performed require investigatory andor remedial work ensure adequate protection environment 1993 company recorded 215 million beforetax provisions provide environmental remediation efforts including superfund sites actual expenditures charged provisions previously established reserves amounted 183 million 1993 yearend 1993 companys environmental remediation reserve 746 million including 56 million related superfund sites receivables 18 million recorded expected reimbursements expenditures environmental cleanup provisions superfund law environmental protection agency epa well certain state agencies designated chevron potentially responsible party prp remediation portion 223 hazardous waste sites yearend 1993 companys cumulative share costs settlements approximately 145 sites payments provisions made 1993 prior years 89 million including provision 6 million 1993 remaining sites investigations yet stage company able quantify probable liability determine range possible exposure superfund law provides joint several liability future actions epa regulatory agencies require chevron assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity provisions recorded work identified sites assessment remediation plan developed costs reasonably estimated likely company continue incur additional charges environmental programs relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable insurance sources amounts future costs may material companys results operations period recognized company expect costs material effect chevrons consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic fs3 international petroleum chemicals concerns although environmental compliance costs substantial company reason believe vary significantly similar costs incurred companies engaged similar businesses similar areas company believes costs ultimately reflected petroleum chemicals industries prices products services 1990 amendments clean air act require significant capital expenditures industry meet cleanair regulations companys capital expenditures related air quality 434 million 1993 estimated 1994 total capital environmental expenditures 686 million 478 million spent meet federal state cleanair regulations products facilities addition ongoing costs complying environmental regulations addition reserves environmental remediation discussed company maintains reserves dismantlement abandonment restoration worldwide oil gas mineral properties end productive lives costs environmentally related provisions recognized depreciation expense properties produced amount reserves yearend 1993 15 billion companys ongoing operating assets refineries provisions made exit cleanup costs may required assets reach end useful lives contingencies yearend 1993 company 222 million suspended exploratory wells included properties plant equipment wells suspended pending drilling additional wells determine commercially producible quantities oil gas reserves present ultimate disposition well costs dependent results future activity company subject various lawsuits claims contingent liabilities discussed notes accompanying consolidated financial statements company believes resolution matters materially affect financial position liquidity new accounting standards november 1992 financial accounting standards board fasb issued statement financial accounting standards sfas 112 employers accounting postemployment benefits established accounting standards employers provide benefits former inactive employees termination retirement may 1993 fasb issued sfas 115 accounting certain investments debt equity securities companys current accounting practices substantially compliance new standards accordingly adoption two standards first quarter 1994 material effect companys consolidated financial statements affect liquidity special items net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability years adjacent table summarizes losses gains aftertax basis special items included companys reported net income millions dollars 1993 1992 1991 asset dispositions 122 757 149 restructurings reorganizations 554 40 185 prioryear tax adjustments 130 72 173 environmental remediation provisions 90 44 160 asset writeoffs revaluations 71 133 24 lifo inventory losses gains 46 26 16 114 65 35 total special items 883 651 66 asset dispositions 1993 resulted companys continuing program dispose marginal nonstrategic assets ortho lawn garden products business major asset sold 1993 generating 130 million gain addition oil gas properties united states indonesia undeveloped coal properties united states marketing assets central america sold year resulting net loss 8 million 1992 assets sold included oil gas properties united states united kingdom canada sudan us fertilizer business copper interest chile addition stock us oil gas subsidiary exchanged pennzoil company 15750000 shares chevron stock transaction valued 11 billion fs4 combination smaller sales resulted aftertax gains 757 million 1991 sales producing properties united states oman spain nonproducing properties united kingdom certain us geothermal properties agricultural chemicals interest together companys share gain asset sale caltex affiliate resulted net gains 149 million restructurings reorganizations charges 1993 amounted 554 million primarily second quarter provision restructure chevrons us refining marketing business charge totaling 543 million composed primarily writedown refineries facilities related inventories estimated realizable values also included charges provisions environmental site assessments employee severance company taken account probable environmental cleanup obligations estimating realizable value refineries responsibility obligations negotiated potential buyers 1992 chevron recorded net charge 40 million associated restructuring workforce reductions provisions 105 million workforce reductions offset 65 million pension settlement gains connection companys enhanced early retirement program 1991 charges 185 million recorded reconfiguration port arthur refinery companywide workforce reductions prioryear tax adjustments generally result issues open tax years settled taxing authorities reevaluated company result new developments also adjustments required effect deferred income taxes changes statutory tax rates environmental remediation provisions pertain estimated future costs environmental remediation programs certain companys us service stations marketing terminals refineries chemical plants locations divested operations chevron liability future remediation costs sites commonly referred superfund sites company prp addition amount included 1993 restructuring charge discussed provisions amounted 90 million 1993 44 million 1992 160 million 1991 asset writeoffs revaluations 1993 comprised certain us refinery assets us canadian production assets miscellaneous corporate assets asset writeoffs 1992 consisted 110 million writedown companys canadian beaufort sea properties net 23 million charge related certain us refining marketing chemical fertilizer assets certain us refinery assets 24 million written 1991 lifo inventory gains losses result reduction inventories certain inventory pools valued lastin firstout lifo accounting method lifo losses decreased 1993 net income 46 million 1992 net income 26 million however drawdowns lifovalued inventories increased net income 1991 16 million lowcost inventories relative thencurrent costs liquidated amounts include companys equity share caltex lifo inventory effects chevrons consolidated petroleum inventories 99 million barrels yearend 1993 105 million barrels yearend 1992 121 million barrels yearend 1991 special items 1993 included net additions 70 million reserves various litigation regulatory issues onetime cash bonus award employees totaling 60 million offset favorable inventory adjustment 16 million 1992 insurance recoveries chemical products licensing agreements 76 million partially offset 11 million net additions reserves various litigation regulatory issues 1991 additions 35 million made litigation regulatory reserves results operations strong worldwide refined product sales margins higher us natural gas prices mitigated effects lower crude oil prices 1993 important contributor companys improved operating performance large reduction operating administrative costs also lower interest exploration expenses helped earnings chemicals operations continued depressed levels similar 1993 increase 1992 operating earnings 1991 levels reflected reduced operating administrative costs higher us natural gas prices improved us refined product sales margins benefits partly offset lower earnings international refining marketing worldwide chemicals operations weak global economic conditions held product prices shrinking sales margins fs5 sales operating revenues 362 billion 382 billion 1992 381 billion 1991 revenues declined 1992 1991 levels primarily due lower crude oil refined products prices partly offset higher natural gas prices 6 billion decline income 1993 due lower asset sales gains operating expenses adjusted special items declined significantly result companys extensive costreduction programs initiated early 1992 operating expenses administrative costs 1993 adjusted special items declined 358 million 1992 coupled 512 million reduction 1992 1991 levels twoyear reduction costs totaled 870 million 11 percent decrease 1991 company believes achieved significant reduction cost structure cost savings sustainable millions dollars 1993 1992 1991 reported operating expenses 6267 6145 6933 reported selling general administrative expenses 1530 1761 1704 total operational costs 7797 7906 8637 eliminate special charges tax 531 282 501 adjusted ongoing operational costs 7266 7624 8136 operations charged market rates consumption companys fuel costs eliminated consolidated financial statements cost performance measurement costs included amounted 1017 1251 1272 1993 1992 1991 respectively taxes income 12 billion 1993 13 billion 1992 959 million 1991 equating effective income tax rates 479 percent 362 percent 426 percent three years respectively increase 1993 tax rate due primarily unfavorable prioryear tax adjustments including increase deferred income taxes resulting 1 percent increase us corporate income tax rate lower effective tax rate 1992 primarily attributable low overall tax cost property dispositions primarily taxfree exchange pennzoil partially offsetting effects lower favorable prioryear tax adjustments 1992 proportionately lower equity affiliate income recorded aftertax basis 1991 effective tax rate benefited favorable prioryear tax adjustments currency transactions increased net income 46 million 1993 90 million 1992 compared decrease 4 million 1991 amounts include companys share affiliates currency transactions gain currency transactions 1993 resulted primarily fluctuations value nigerian currency relative us dollar 1992 gains resulted fluctuations currencies united kingdom canada australia nigeria results major operating areas millions dollars 1993 1992 1991 exploration production united states 566 1043 285 international 580 594 717 total exploration production 1146 1637 1002 refining marketing transportation united states 170 297 153 international 252 111 486 total refining marketing transportation 82 408 333 total petroleum 1228 2045 1335 chemicals 143 89 151 coal minerals 44 198 7 corporate 150 122 200 income cumulative effect changes accounting principles 1265 2210 1293 cumulative effect changes accounting principles 641 net income 1265 1569 1293 fs6 special items major operating areas millions dollars 1993 1992 1991 exploration production united states 136 413 46 international 61 14 138 total exploration production 197 427 92 refining marketing transportation united states 725 53 335 international 1 3 133 total refining marketing transportation 724 56 202 total petroleum 921 371 110 chemicals 112 53 34 coal minerals 159 4 corporate 74 68 14 total special items included net income 883 651 66 us exploration production earnings 1993 excluding special items improved 11 percent 1992 levels doubled 1991 results 1993 effects lower average crude oil prices lower crude oil natural gas production volumes offset lower operating expenses higher natural gas prices also natural gas contract settlements contributed earnings improvement companys average crude oil realization declined 192 per barrel 1458 1993 average natural gas prices increased 199 per thousand cubic feet compared 170 1992 companys extensive cost cutting efforts disposition highercost oil gas properties 1993 earnings per equivalent barrel excluding special items increased 18 95 millions dollars 1993 1992 1991 earnings excluding special items 702 630 331 asset dispositions 54 419 49 prioryear tax adjustments 40 5 50 environmental remediation provisions 13 2 3 asset writeoffs revaluations 13 restructurings reorganizations 2 35 lifo inventory gains 1 5 1 15 21 55 total special items 136 413 46 reported earnings 566 1043 285 cost cutting efforts higher natural gas prices also major factors 1992s earnings improvement 1991 offsetting lower crude oil prices lower production levels exploration expense declined threeyear period depreciation expense dropped line lower production volumes net liquids production 1993 averaged 394000 barrels per day 432000 1992 454000 1991 net natural gas production 1993 21 billion cubic feet per day approximately 23 billion cubic feet per day 1992 1991 production declines liquids natural gas due primarily disposition producing properties late 1992 international exploration production earnings excluding special items improved 11 percent levels 1992 1991 crude oil prices much higher terms operating agreements countries company produces fluctuations crude oil prices less impact earnings united states contributing factors higher 1993 earnings included lower operating expenses lower exploration expenses higher production volumes millions dollars 1993 1992 1991 earnings excluding special items 641 580 579 prioryear tax adjustments 63 27 45 asset dispositions 29 166 93 asset writeoffs revaluations 19 110 restructurings reorganizations 2 9 lifo inventory losses 1 5 total special items 61 14 138 reported earnings 580 594 717 fs7 net liquids natural gas production increased steadily threeyear period ongoing development projects indonesia west africa mid1992 start production papua new guinea second quarter 1993 start tengiz joint venture contributed increase net liquids production increases net natural gas production occurred primarily australias north west shelf project canada net liquids production 1993 10 percent higher 1991 net natural gas production increased 5 percent threeyear period foreign currency transaction gains 57 million 1993 compared 80 million 1992 19 million 1991 selected operating data 1993 1992 1991 us exploration production net crude oil natural gas liquids production mbpd 394 432 454 net natural gas production mmcfpd 2056 2313 2359 natural gas liquids sales mbpd 211 194 175 revenues net production crude oil bbl 1458 1650 1710 natural gas mcf 199 170 153 international exploration production 1 net crude oil natural gas liquids production mbpd 556 512 504 net natural gas production mmcfpd 469 463 447 natural gas liquids sales mbpd 37 33 29 revenues liftings liquids bbl 1609 1793 1836 natural gas mcf 208 207 228 us refining marketing gasoline sales mbpd 652 646 632 refined product sales mbpd 771 824 812 refinery input mbpd 1307 1311 1278 average refined product sales price bbl 2535 2596 2640 international refining marketing 1 refined product sales mbpd 923 859 823 refinery input mbpd 598 543 517 chemicals sales operating revenues 2 united states 2694 2929 3217 international 602 566 550 worldwide 3296 3495 3767 1 includes equity affiliates years per unit revenues net production 1992 1991 restated include equity affiliates refinery input 1993 includes south africa local government restrictions prohibited disclosure 1992 prior years 2 millions dollars includes sales chevron companies mbpdthousands barrels per day mmcfpdmillions cubic feet per day bblbarrel mcfthousands cubic feet us refining marketing earnings excluding special items improved 59 percent 1992 levels tripled 1991 results weak demand ample supplies depressed refined products margins although average product prices 1993 declined prior year lower crude oil prices lower operating costs stronger markets resulted higher average sales margins compared 1992 late 1993 margins declined somewhat product prices fell faster crude oil prices total product sales volumes declined 3 percent 1992s level although sales highervalued motor fuels increased 1 percent fs8 millions dollars 1993 1992 1991 earnings excluding special items 555 350 182 restructurings reorganizations 543 1 83 environmental remediation provisions 77 42 157 lifo inventory losses gains 44 22 10 prioryear tax adjustments 38 7 33 asset writeoffs revaluations 25 31 24 asset dispositions 1 3 36 48 total special items 725 53 335 reported earnings 170 297 153 industry conditions operating problems plagued companys us refining marketing business 1991 largely turned around 1992 costcutting programs operating efficiencies generated downsizing port arthur refinery improved operations refineries contributed improved earnings 1992 sales refined products increased 2 percent 1991 levels refinery operating problems 1991 reduced product yields increasing maintenance costs requirement outside product purchases international refining marketing earnings include international marine results equity earnings companys caltex petroleum corporation affiliate excluding special items 1993 earnings doubled weak level 1992 still 1991s strong results millions dollars 1993 1992 1991 earnings excluding special items 251 114 353 asset dispositions 13 59 prioryear tax adjustments 4 7 76 lifo inventory losses 3 9 2 asset writeoffs revaluations 1 restructurings reorganizations 1 3 total special items 1 3 133 reported earnings 252 111 486 international downstream operations improved significantly product sales margins recovered prior years weak levels companys marketing areas canada united kingdom caltex areas operations especially south africa singapore lower crude oil operating costs coupled stronger markets boosted sales margins 1993 also companys international trading results improved significantly equity earnings caltex 227 million 180 million 259 million 1993 1992 1991 respectively 1993 earnings reduced 52 million chevrons share caltex ongoing adjustments carrying value petroleum inventories reflect market values earnings 1991 included special gain 59 million asset sale total refined product sales volumes increased 7 percent 1992 12 percent 1991 caltex volumes increased 6 percent year continuing average annual 6 percent growth past several years earnings 1992 fell 1991 levels weak global economic conditions held product prices shrinking sales margins companys areas operations 1991 operating earnings benefited strong sales margins particularly first quarter year product prices fall quickly crude oil prices aftermath persian gulf war chemicals earnings excluding special items fell 14 percent 1992 levels 74 percent 1991 results millions dollars 1993 1992 1991 earnings excluding special items 31 36 117 asset dispositions 130 13 27 prioryear tax adjustments 5 2 restructurings reorganizations 5 1 lifo inventory gains 1 7 asset writeoffs revaluations 8 9 34 total special items 112 53 34 reported earnings 143 89 151 results companys chemicals business reflected continued depressed state commodity chemicals industry suffered several years depressed prices demand due overcapacity coupled weak worldwide economies early 1994 company announced additional measures improve profitability competitiveness chemicals business including workforce reductions cost reductions reorganizations provisions expected cost measures recorded 1993 fs9 1992 addition industry conditions plant shutdowns maintenance hurricane andrew also contributed earnings decline 1991 foreign currency transactions mainly related brazil resulted losses 10 million 1993 1992 compared losses 6 million 1991 coal minerals earnings excluding special items improved 13 percent 1992 levels quadrupled 1991 results operationally decline coal earnings 1993 offset lower noncoal exploration expenses due prioryear property dispositions annual coal sales 1993 exceeded 20 million tons first time margins declined lower prices millions dollars 1993 1992 1991 earnings excluding special items 44 39 11 asset dispositions 5 159 19 prioryear tax adjustments 2 4 3 19 total special items 159 4 reported earnings 44 198 7 operating earnings 1992 threefold 1991 levels primarily higher coal production increased 10 percent prior year additionally expenses noncoal minerals operations lower company continued withdrawal businesses pending sale lead zinc deposits ireland expected completed 1994 sale result gain corporate activities include interest expense interest income cash marketable securities real estate insurance operations activities corporate nature allocated business segments excluding effects special items lower costs 1993 1992 primarily reflected continued decline interest expense due lower average interest rates 1993 lower average debt levels millions dollars 1993 1992 1991 results excluding special items 76 190 214 prioryear tax adjustments 22 82 139 asset writeoffs revaluations 13 restructurings reorganizations 1 7 102 82 21 23 total special items 74 68 14 reported earnings 150 122 200 reported earnings 1992 1991 included provisions 41 million 102 million companywide voluntary enhanced early retirement program 1992 65 million pension settlement gains recognized connection program amounts considered corporate items properly allocable companys business segments liquidity capital resources cash equivalents marketable securities increased 321 million 20 billion yearend 1993 cash provided operating activities increased 307 million 1993 42 billion compared 39 billion 1992 33 billion 1991 1993 increase reflects higher operational earnings adjusted noncash charges decreased working capital requirements cash operations proceeds asset sales used fund companys capital expenditures dividend payments stockholders retirement debt yearend 1993 company classified 19 billion shortterm obligations longterm debt settlement obligations primarily commercial paper expected require use working capital 1994 company intent ability refinance longterm basis commercial paper reclassified longterm debt also intended reissued continuously refinanced longterm basis december 31 1993 chevron 36 billion committed credit facilities various major banks facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 1993 fs10 chevron one subsidiaries existing shelf registrations file securities exchange commission would permit registered offerings approximately 105 billion debt securities 1993 company prepaid two fixedterm us public debt issues totaling 600 million early 1994 additional 200 million fixedterm us public debt called early repayment debt issues refinanced shortterm commercial paper company pursued aggressive debt management strategy focused shortterm variablerate financing strategy together general decline interest rates reduced companys annual average beforetax interest rate 76 percent 1991 57 percent 1992 46 percent 1993 variablerate component total debt 68 percent end 1993 chevrons total debt 7538 billion yearend 1993 303 million 7841 billion yearend 1992 companys future debt level primarily dependent capital spending program business outlook company currently expect debt level increase significantly 1994 believes substantial borrowing capacity meet unanticipated cash requirements light currently low crude oil prices company intends monitor capital spending may make adjustments year progresses financial ratios 1993 1992 1991 current ratio 08 09 interest coverage ratio 74 82 51 total debttotal debt plus equity 350 364 343 current ratio current assets current liabilities yearend two items affect current ratio negatively companys opinion affect liquidity included current assets years inventories valued lifo basis yearend 1993 lower current costs 671 million also yearend 1993 25 billion commercial paper included current liabilities planned refinanced continuously chevrons interest coverage ratio decreased 1993 due lower beforetax income interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs companys debt ratio total debt total debt plus equity decreased 350 percent due primarily net reduction debt 303 million companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1 standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities january 1994 company increased quarterly dividend 5 cents per share 925 annualized rate 370 per share proposed twoforone split issued common stock stockholders asked approve increase number authorized shares common stock 500 million 1 billion accommodate split also approve stock split annual meeting may 3 1994 capital exploratory expenditures 1993 1992 1991 millions interna dollars us tional total us tional total us tional total exploration production 763 1599 2362 792 1458 2250 1121 1408 2529 refining marketing transportation 949 748 1697 962 749 1711 974 775 1749 chemicals 199 34 233 224 37 261 195 34 229 coal minerals 47 10 57 65 20 85 99 14 113 91 116 166 1 167 total 2049 2391 4440 2159 2264 4423 2555 2232 4787 total excluding equity affili ates 2029 1710 3739 2136 1666 3802 2540 1749 4289 fs11 worldwide capital exploratory expenditures 1993 including companys equity share affiliates expenditures totaled 44 billion expenditures exploration production accounted 53 percent total outlays 1993 51 percent 1992 53 percent 1991 us exploration production spending declined 32 percent worldwide exploration production expenditures 1993 35 percent 1992 44 percent 1991 reflecting companys increasing focus international exploration production activities company projects 1994 capital exploratory expenditures approximately 49 billion including chevrons share spending affiliates excluding affiliates spending essentially flat 37 billion 1994 program provides 24 billion exploration production investments 75 percent international projects company participating several significant oil gas development projects include development hibernia field coast newfoundland tengiz project kazakhstan steam waterflood projects indonesia expansion north west shelf liquefied natural gas project australia additional development north sea nigeria angola continuing enhanced oil recovery projects california natural gas development project norphlet trend gulf mexico refining marketing transportation expenditures estimated 21 billion 1 billion planned us including upgrading us refineries produce reformulated gasolines needed comply clean air act balance focused high growth asia pacific rim countries companys caltex affiliate several major refinery projects way increase capacity meet rising demand quarterly results stock market data unaudited fs12 report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements assuring integrity objectivity statements prepared accordance generally accepted accounting principles fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited price waterhouse independent accountants selected audit committee approved stockholders management made available price waterhouse companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management kenneth derr martin r klitten donald g henderson chairman board vice president finance vice president chief executive officer comptroller february 25 1994 report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1993 1992 results operations cash flows three years period ended december 31 1993 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed discussed note 2 consolidated financial statements effective january 1 1992 company changed methods accounting postretirement benefits pensions income taxes price waterhouse san francisco california february 25 1994 fs13 consolidated statement income year ended december 31 millions dollars except pershare amounts 1993 1992 1 1991 1 revenues sales operating revenues 2 36191 38212 38118 equity net income affiliated companies 440 406 491 income 451 1059 334 total revenues 37082 39677 38943 costs deductions purchased crude oil products 18007 19872 19693 operating expenses 6267 6145 6933 provision us refining marketing restructuring 837 exploration expenses 360 507 629 selling general administrative expenses 1530 1761 1704 depreciation depletion amortization 2452 2594 2616 taxes income 2 4886 4899 4597 interest debt expense 317 436 519 total costs deductions 34656 36214 36691 income tax expense cumulative effect changes accounting principles 2426 3463 2252 income tax expense 1161 1253 959 income cumulative effect changes accounting principles 1265 2210 1293 cumulative effect changes accounting principles 641 net income 1265 1569 1293 per share common stock income cumulative effect changes accounting principles 389 652 369 cumulative effect changes accounting principles 189 net income per share common stock 389 463 369 weighted average number shares outstanding 325478876 338977414 350174450 1 reclassified see note 1 2 includes consumer excise taxes 4068 3964 3659 see accompanying notes consolidated financial statements fs14 consolidated balance sheet december 31 millions dollars 1993 1992 assets cash equivalents 1644 1292 marketable securities cost 372 403 accounts notes receivable less allowance 1993 66 1992 66 3808 4115 inventories crude oil petroleum products 1108 1276 chemicals 423 497 materials supplies 252 292 merchandise 18 70 1801 2135 prepaid expenses current assets 1057 827 total current assets 8682 8772 longterm receivables 94 127 investments advances 3623 2451 properties plant equipment cost 44807 44010 less accumulated depreciation depletion amortization 22942 21822 21865 22188 deferred charges assets 472 432 total assets 34736 33970 liabilities stockholders equity accounts payable 3325 3469 accrued liabilities 2538 2009 shortterm debt 3456 2888 federal taxes income 782 967 taxes payable 505 502 total current liabilities 10606 9835 longterm debt capital lease obligations 4082 4953 noncurrent deferred income taxes 2916 2894 reserves employee benefit plans 1458 1400 deferred credits noncurrent obligations 1677 1160 total liabilities 20739 20242 preferred stock authorized 100000000 shares 100 par value none issued common stock authorized 500000000 shares 300 par value 356243534 shares issued 1069 capital excess par value 1855 1840 deferred compensation employee stock ownership plan esop 920 954 currency translation adjustment 108 56 retained earnings 13955 13814 treasury stock cost 1993 30504429 shares 1992 31069745 shares 2070 2097 total stockholders equity 13997 13728 total liabilities stockholders equity 34736 33970 see accompanying notes consolidated financial statements fs15 consolidated statement cash flows year ended december 31 millions dollars 1993 1992 1991 operating activities net income 1265 1569 1293 adjustments depreciation depletion amortization 2452 2594 2616 dry hole expense related prior years expenditures 29 57 35 distributions less equity affiliates income 173 144 220 net beforetax losses gains asset retirements sales 373 568 25 net currency translation gains losses 27 66 4 deferred income tax provision 160 176 183 cumulative effect changes accounting principles 641 net decrease increase operating working capital 1 463 82 249 1 75 43 net cash provided operating activities 2 4221 3914 3278 investing activities capital expenditures 3323 3352 3693 proceeds asset sales 908 1043 768 net sales marketable securities 3 30 45 18 net cash used investing activities 2385 2264 2907 financing activities net borrowings shortterm obligations 293 1333 1564 proceeds issuance longterm debt 199 23 35 repayments longterm debt financing obligations 854 1260 711 cash dividends paid 1139 1115 1139 purchases treasury shares 4 382 286 net cash used financing activities 1505 1401 537 effect exchange rate changes cash equivalents 21 3 20 net change cash equivalents 352 252 186 cash equivalents beginning year 1292 1040 1226 cash equivalents yearend 1644 1292 1040 1 net decrease increase operating working capital composed following decrease accounts notes receivable 187 97 692 decrease inventories 288 292 312 increase decrease prepaid expenses current assets 52 85 151 increase decrease accounts payable accrued liabilities 214 567 880 decrease increase income taxes payable 174 175 222 net decrease increase operating working capital 463 82 249 2 net cash provided operating activities includes following cash payments interest income taxes interest paid debt net capitalized interest 309 392 453 income taxes paid 1505 1236 1460 3 net sales marketable securities consists following gross amounts marketable securities purchased 1855 2633 4104 marketable securities sold 1885 2678 4122 net sales marketable securities 30 45 18 see accompanying notes consolidated financial statements fs16 consolidated statement stockholders equity fs17 notes consolidated financial statements millions dollars note 1 summary significant accounting policies chevron corporation consolidated subsidiaries company employ accounting policies accordance generally accepted accounting principles united states subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 50 percent company participates policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method accounting used oil gas exploration production activities shortterm investments shortterm investments part companys cash management portfolio classified cash equivalents investments highly liquid generally original maturities three months less shortterm investments classified marketable securities inventories crude oil petroleum products chemicals merchandise stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment costs development wells related plant equipment including carbon dioxide certain injected materials used enhanced recovery projects mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed proved oil gas properties regularly assessed possible impairment aggregate worldwide portfolio basis applying informal ceiling test securities exchange commission method possibility impairment may exist aggregate net book carrying value properties net applicable deferred income taxes exceeds aggregate undiscounted future cash flows tax properties calculated accordance accounting rules supplemental information oil gas producing activities addition highcost longleadtime oil gas projects individually assessed prior production startup comparing recorded investment project fair market economic value appropriate economic values generally based managements expectations discounted future aftertax cash flows project time assessment depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests determined using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal mineral assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized environmental expenditures environmental expenditures relate current ongoing operations existing condition caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing accruals coincides companys commitment formal plan action approved remediation plan sale disposal asset oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs current dollars using currently available technology applying current regulations well companys internal environmental policies future amounts discounted probable recoveries reimbursements recorded asset fs18 note 1 summary significant accounting policies continued currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions included income currently cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes effective 1992 company accounts income taxes accordance statement financial accounting standards 109 accounting income taxes 1991 company accounted income taxes accordance statement 96 accounting income taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely reclassification certain revenues purchases conform presentation 1993 years 1992 1991 consolidated income statement reclassified net certain offsetting forward crude oil purchases sales contracts reclassification effect net income period sales operating revenues purchased crude oil products decreased 3216 1992 2002 1991 amounts previously reported note 2 adoption statements financial accounting standards 106 employers accounting postretirement benefits pensions sfas 106 109 accounting income taxes sfas 109 effective january 1 1992 company adopted sfas 106 sfas 109 issued financial accounting standards board effects statements 1992 net income included charge 641 189 per share attributable cumulative effect adoption including companys share equity affiliates net charge composed 833 related tax benefits 423 recognition liabilities retiree benefits primarily health life insurance partially offset credit 192 deferred income tax benefits changes stipulated new income tax accounting rules apart cumulative effect adoption statements increased earnings 1992 163 tax 48 per share new income tax accounting benefits 200 recorded largely due strengthening dollar 1992 resulted lower foreign deferred tax liabilities benefits partly offset 37 additional aftertax expense retiree benefits compared previous practice expensing costs paid note 3 special items financial information net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net increase decrease net income related tax effects year ended december 31 1993 1992 1991 asset dispositions net ortho lawn garden products 130 oil gas properties 25 209 44 stock exchange pennzoil company 376 copper interest chile 159 17 13 105 122 757 149 asset writeoffs revaluations oil gas properties 31 110 refining marketing assets 24 31 24 16 8 71 133 24 prioryear tax adjustments 130 72 173 environmental remediation provisions 90 44 160 restructurings reorganizations workforce reductions net 11 40 102 us refining marketing 543 83 554 40 185 lifo inventory losses gains 46 26 16 net litigation regulatory issues 70 11 35 onetime employee bonus 60 chemicals products license agreements 32 adjustments 16 44 114 65 35 total special items tax 883 651 66 amounts include companys share equity affiliates transactions us refining marketing restructuring charge 543 primarily composed writedown two refineries related inventories estimated realizable values also included charge provisions environmental site assessments employee severance estimated realizable value refineries took account probable environmental cleanup obligations responsibility obligations negotiated potential buyers refineries located port arthur texas philadelphia pennsylvania combined refinery capacity 350000 barrels per day fs19 note 3 special items financial information continued financial information follows year ended december 31 1993 1992 1991 total financing interest debt costs 371 478 546 less capitalized interest 54 42 27 interest debt expense 317 436 519 research development expenses 206 229 250 currency transaction gains losses 46 90 4 includes 18 24 1993 1992 respectively companys share affiliates currency transaction effects 1991 net effect zero excess current cost based average acquisition costs year carrying value inventories lifo method used 671 803 december 31 1993 1992 respectively note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following noncash transactions 1993 company acquired 50 percent interest tengizchevroil joint venture tco republic kazakhstan series cash noncash transactions companys interest tco accounted using equity method accounting recorded investments advances consolidated balance sheet cash expended connection formation tco subsequent advances tco included consolidated statement cash flows capital expenditures deferred payment portion tco investment totaled 709 yearend 1993 recorded accrued liabilities deferred credits noncurrent obligations consolidated balance sheet timing payments dependent occurrence certain future events including pace field development completion successful operation export pipeline system 1993 payments related deferred portion tco investment classified repayments longterm debt financing obligations consolidated statement cash flows companys employee stock ownership plan esop repaid 30 20 matured debt guaranteed chevron corporation 1993 1991 respectively company reflected payment reductions debt outstanding deferred compensation esop company refinanced aggregate amount 334 57 tax exempt longterm debt capital lease obligations 1993 1992 respectively 1991 company refinanced 970 longterm bank notes esop public issuance sec registered longterm notes like amount refinancings reflected consolidated statement cash flows 1992 company received 15750000 shares common stock held stockholder exchange stock subsidiary owning certain us oil gas producing properties related facilities cash current assets current liabilities value attributed treasury shares received 1100 property exchanged consisted properties plant equipment carrying value 790 excluding cash net current liabilities 1 cash 57 included reduction proceeds asset sales 1992 company acquired additional ownership interest affiliate accounted equity method noncash transaction increase ownership required consolidation affiliate companys financial statements principal result consolidation increase noncurrent assets liabilities approximately 64 noncash transactions occurred years presented include reissuance treasury shares management compensation plans acquisitions properties plant equipment capital lease transactions changes stockholders equity longterm debt liabilities resulting accounting companys esop amounts transactions material aggregate relation companys financial position major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented year ended december 31 1993 1992 1991 additions properties plant equipment 3214 3342 3698 additions investments 179 47 48 payments liabilities assets net 70 37 53 capital expenditures 3323 3352 3693 expensed exploration expenditures 330 450 594 equipment acquired noncash capital lease transaction 2 repayments longterm debt financing obligations 86 capital exploratory expenditures excluding equity companies 3739 3802 4289 note 5 stockholders equity retained earnings december 31 1993 include 2087 companys share undistributed earnings equity affiliates 1988 company declared dividend distribution one right outstanding share common stock rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company right entitles holder purchase stock value equal two times exercise price right person group acquired 10 percent fs20 note 5 stockholders equity continued outstanding shares common stock without prior consent company would entitled purchase opportunity rights expire november 1998 may redeemed company 5 cents per share prior date rights voting dividend rights become exercisable dilutive effect earnings company five million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1993 made rights exercisable board directors proposed twoforone split companys issued common stock stockholders asked approve split increase authorized shares common stock 500 million 1 billion accommodate split annual stockholders meeting may 3 1994 approved split effective may 11 1994 stockholders record date note 6 financial instruments offbalance sheet risk company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures offsetting gains losses contracts recognized concurrently exchange gains losses stemming associated commitments december 31 1993 1992 company recognized gains losses forward contracts carrying approximate fair value 114 119 respectively concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities trade receivables companys cash equivalents marketable securities highquality securities placed wide array institutions high credit ratings investment policy limits companys exposure concentrations credit risk trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit principal security obtained support lines credit negotiated contracts financial strength customer considered sufficient fair value december 31 1993 companys longterm debt 2057 estimated fair value 2238 fair value based quoted market prices december 31 1993 present value expected cash flows quoted market price available reported amounts financial instruments cash equivalents marketable securities shortterm debt approximate fair value short maturity note 7 summarized financial data chevron usa inc december 31 1993 chevron usa inc chevron corporations principal operating company consisting primarily companys us integrated petroleum operations excluding domestic pipeline operations conducted three divisions chevron usa production company chevron usa products company warren petroleum company summarized financial information chevron usa inc consolidated subsidiaries presented year ended december 31 1993 1992 1991 sales operating revenues 28092 29454 29073 total costs deductions 27588 28410 28861 income cumulative effect changes accounting principles 325 811 90 cumulative effect changes accounting principles 573 net income 325 238 90 december 31 1993 1992 current assets 3661 4200 assets 14099 14587 current liabilities 5936 5528 liabilities 5738 6795 net equity 6086 6464 conform presentation adopted 1993 1992 1991 periods reclassified net certain offsetting crude oil purchases sales contracts reclassification effect net income see note 1 note 8 litigation company defendant numerous lawsuits addition mentioned note plaintiffs may seek recover large sometimes unspecified amounts matters may remain unresolved several years april 1991 united states district court texas ruled favorably claims brought former employees gulf participants gulf pension plan partial termination plan occurred however court denied plaintiffs claims share surplus plan assets october 1991 district court approved partial settlement parties agreed appeal partial termination claims except relevant plaintiffs claims share surplus plan assets claims fifth circuit court appeals second partial settlement implemented 1993 resulting charge earnings 48 lawsuit brought company oxy usa inc successor interest cities service company remains pending oklahoma state court suit involves claims breach contract misrepresentation related termination gulf oil corporations offer purchase cities stock 1982 gulf acquired chevron 1984 fs21 note 8 litigation continued management opinion resolution lawsuits result significant liability company relation consolidated financial position liquidity note 9 geographic segment data geographic segment distributions companys identifiable assets operating income sales operating revenues summarized following tables companys primary business integrated petroleum operations secondary operations include chemicals coal companys real estate insurance operations worldwide cash management financing activities corporate december 31 1993 1992 1991 identifiable assets united states petroleum 16443 18508 20056 chemicals 2045 2165 2210 coal minerals 744 762 767 total united states 19232 21435 23033 international petroleum 12202 9671 9018 chemicals 412 390 402 coal minerals 13 10 12 total international 12627 10071 9432 total identifiable assets 31859 31506 32465 corporate 2877 2464 2171 total assets 34736 33970 34636 year ended december 31 1993 1992 1991 operating income united states petroleum 692 1693 289 chemicals 162 46 149 coal minerals 59 68 27 total united states 913 1807 465 international petroleum 1772 1731 2205 chemicals 63 70 47 coal minerals 3 177 26 total international 1832 1978 2226 total operating income 2745 3785 2691 corporate 319 322 439 income tax expense 1161 1253 959 income cumulative effect changes accounting principles 1265 2210 1293 cumulative effect changes accounting principles 641 net income 1265 1569 1293 year ended december 31 1993 1992 1991 sales operating revenues united states petroleumrefined products 13169 13964 13921 crude oil 4086 5138 6649 natural gas 1776 1631 1502 natural gas liquids 1098 1075 1043 petroleum revenues 682 700 611 excise taxes 2554 2458 2267 intersegment 924 1052 1226 total petroleum 24289 26018 27219 chemicalsproducts 2211 2409 2652 intersegment 248 266 252 total chemicals 2459 2675 2904 coal mineralsproducts 447 395 417 total united states 27195 29088 30540 international petroleumrefined products 2920 2857 2873 crude oil 4415 4893 3627 natural gas 380 364 367 natural gas liquids 137 115 122 petroleum revenues 285 227 201 excise taxes 1499 1490 1374 intersegment 1 10 13 total petroleum 9637 9956 8577 chemicalsproducts 497 463 446 excise taxes 15 16 18 intersegment 6 5 4 total chemicals 518 484 468 coal mineralsproducts 2 10 total international 10155 10442 9055 intersegment sales elimination 1179 1333 1495 corporate 20 15 18 total sales operating revenues 36191 38212 38118 memo intergeographic sales united states 266 309 361 international 4418 3823 3497 conform presentation adopted 1993 1992 1991 periods reclassified net certain offsetting crude oil purchases sales contracts reclassification effect net income see note 1 operating income geographic areas includes allocated corporate overhead 1992 1991 operating income business segments excluded corporate charges 63 154 companywide voluntary enhanced early retirement program 1992 103 pension settlement gains recognized connection program amounts included corporate identifiable assets include assets associated operations indicated geographic areas including investments affiliates sales operating revenues petroleum segment derived production sale crude oil fs22 note 9 geographic segment data continued natural gas natural gas liquids refining marketing petroleum products company also obtains revenues transportation trading crude oil refined products chemicals revenues result primarily sale petrochemicals plastic resins lube oil fuel additives coal minerals revenues relate primarily coal sales operating revenues table include sales unaffiliated customers sales transfer products segments sales transfer products segments geographic areas generally estimated market prices transfers geographic areas presented memo items table equity earnings affiliated companies associated segments affiliates operate sales caltex group included international petroleum segment information affiliates presented note 11 affiliates either material vertically integrated segments operations note 10 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows december 31 1993 1992 petroleum exploration production 50 refining marketing transportation 554 553 604 603 less accumulated amortization 409 381 net capitalized leased assets 195 222 december 31 1993 future minimum lease payments operating capital leases follows december 31 operating capital year leases 1994 174 41 1995 143 48 1996 128 43 1997 110 41 1998 100 42 thereafter 220 500 total 875 715 less amounts representing interest executory costs 292 net present value 423 less capital lease obligations included shortterm debt 278 longterm capital lease obligations 145 future sublease rental income 46 rental expenses incurred operating leases 1993 1992 1991 follows december 31 1993 1992 1991 minimum rentals 452 408 472 contingent rentals 9 10 11 total 461 418 483 less sublease rental income 15 14 49 net rental expense 446 404 434 contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time note 11 investments advances investments advances companies accounted using equity method investments accounted cost follows december 31 1993 1992 equity method affiliates caltex group 2147 1905 affiliates 1353 450 3500 2355 cost 123 96 total investments advances 3623 2451 chevron owns 50 percent pt caltex pacific indonesia exploration production company operating indonesia caltex petroleum corporation subsidiaries affiliates conducts refining marketing activities asia africa australia new zealand american overseas petroleum limited subsidiaries manages certain companys exploration production operations indonesia companies subsidiaries affiliates collectively called caltex group affiliates includes tengizchevroil 50 percent owned joint venture formed 1993 republic kazakhstan develop tengiz oil field equity earnings companies accounted equity method together dividends similar distributions received equity method companies years 1993 1992 1991 follows year ended december 31 equity earnings dividends 1993 1992 1991 1993 1992 1991 caltex group 361 334 422 172 183 202 affiliates 79 72 69 95 79 68 total 440 406 491 267 262 270 cumulative effect changes accounting principles fs23 note 11 investments advances continued companys transactions affiliated companies primarily purchase indonesian crude oil pt caltex pacific indonesia sale crude oil products caltex petroleum corporations refining marketing companies summarized following table year ended december 31 1993 1992 1991 sales caltex group 1739 1784 1537 sales affiliates 5 66 total sales affiliates 1744 1789 1603 purchases caltex group 842 797 821 purchases affiliates 101 56 23 total purchases affiliates 943 853 844 accounts notes receivable consolidated balance sheet include 156 215 december 31 1993 1992 respectively amounts due affiliated companies accounts payable include 35 33 december 31 1993 1992 respectively amounts due affiliated companies following tables summarize combined financial information caltex group substantially equity method companies together chevrons share amounts shown affiliates 100 percent note 12 properties plant equipment expenses maintenance repairs 875 1045 1229 1993 1992 1991 respectively fs24 note 13taxes year ended december 31 1993 1992 1991 taxes income united states taxes production 135 140 153 import duties 21 18 17 excise taxes products merchandise 2554 2458 2267 property miscellaneous taxes excluding payroll taxes 380 416 428 3090 3032 2865 payroll taxes 122 141 145 total united states 3212 3173 3010 international taxes production 7 30 14 import duties 22 55 50 excise taxes products merchandise 1514 1506 1392 property miscellaneous taxes excluding payroll taxes 112 114 111 1655 1705 1567 payroll taxes 19 21 20 total international 1674 1726 1587 total taxes income 4886 4899 4597 year ended december 31 1993 1992 1991 taxes income us federal current 394 329 163 deferred 241 129 185 deferred adjustment enacted changes tax lawsrates 54 state local 63 54 16 total united states 270 254 6 international current 864 1046 963 deferred 48 47 2 deferred adjustment enacted changes tax lawsrates 21 total international 891 999 965 total taxes income 1161 1253 959 us federal income tax expense reduced 57 49 27 1993 1992 1991 respectively lowincome housing business tax credits 1993 beforetax income us operations 687 compared 1592 1992 157 1991 beforetax income international operations 1739 1871 2095 1993 1992 1991 respectively deferred income tax provisions included benefits 98 163 67 related properties plant equipment 1993 1992 1991 respectively us benefits recorded 1993 related us refining marketing restructuring provision 1991 us deferred tax provision included benefits accrued reserves established port arthur reconfiguration corporate severance program 1992 tax related cumulative effect adopting sfas 106 note 2 423 representing deferred income tax benefits approximating statutory tax rate companys effective income tax rate varied us statutory federal income tax rate following year ended december 31 1993 1992 1991 statutory us federal income tax rate 350 340 effects income taxes international operations excess taxes us statutory rate 156 152 237 effects asset dispositions 06 80 20 state local taxes income net us federal income tax benefit 22 11 06 prioryear tax adjustments 30 06 42 effects enacted changes tax lawsrates deferred tax liabilities 13 tax credits 24 14 12 others 09 18 consolidated companies 532 394 491 effect recording equity income certain affiliated companies aftertax basis 53 32 65 effective tax rate 479 362 426 company records deferred taxes tax jurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1993 1992 deferred taxes classified consolidated balance sheet follows year ended december 31 1993 1992 prepaid expenses current assets 495 313 deferred charges assets 146 132 federal taxes income 27 24 noncurrent deferred income taxes 2916 2894 total deferred taxes net 2302 2473 reported deferred tax balances composed following deferred tax liabilities assets year ended december 31 1993 1992 properties plant equipment 3933 3869 inventory 293 318 miscellaneous 237 195 deferred tax liabilities 4463 4382 abandonmentenvironmental reserves 910 792 employee benefits 535 492 amtother tax credits 486 580 accrued liabilities 472 338 miscellaneous 255 159 deferred tax assets 2658 2361 deferred tax assets valuation allowance 497 452 total deferred taxes net 2302 2473 fs25 note 13 taxes continued companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 3300 december 31 1993 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 247 would payable upon remittance earnings note 14 shortterm debt december 31 1993 1992 commercial paper 4391 4023 current maturities longterm debt 167 89 current maturities longterm capital leases 23 24 redeemable longterm obligations longterm debt 297 320 capital leases 255 notes payable 203 277 5336 4988 reclassified longterm debt 1880 2100 total shortterm debt 3456 2888 redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date selected data companys commercial paper activities shown weighted average maximum average interest outstanding average interest balance rate amount rate year december 31 december 31 month end outstanding year 1993 4390 33 4891 4445 31 1992 4023 35 4441 3958 36 1991 2748 48 2748 1863 57 average amounts outstanding weighted average interest rates year based average daily balances outstanding amounts used computations include amounts classified longterm debt 1993 1992 1991 note 15 longterm debt december 31 1993 1992 811 amortizing notes due 2004 1 750 825 notes due 1996 2 301 875 notes due 1996 2 300 9375 sinkingfund debentures due 2016 278 292 676 serial notes due 19941997 1 3 190 220 7875 notes due 1997 4 200 199 56 notes due 1998 190 975 sinkingfund debentures due 2017 179 190 4625 200 million swiss franc issue due 1997 136 137 longterm obligations 688 3 less 50 individually 223 318 foreign currency obligations 681 3 78 66 total including debt due within one year 2224 2773 debt due within one year 167 89 reclassified shortterm debt 317 3 1880 2100 total longterm debt 3937 4784 1 guarantee esop debt 2 debt retired maturity date 3 weighted average interest rate december 31 1993 4 called early 1994 chevron one wholly owned subsidiaries shelf registrations file securities exchange commission sec would permit issuance 1050 debt securities pursuant rule 415 securities act 1933 yearend 1993 company 3595 committed credit facilities banks worldwide 1880 termination dates beyond one year credit agreements provide commitments term loans 3280 revolving credit shortterm advances 315 facilities also support companys commercial paper borrowings interest borrowings agreements based either london interbank offered rate reserve adjusted domestic certificate deposit rate amounts outstanding credit agreements year yearend december 31 1993 1992 company classified 1880 2100 respectively shortterm debt longterm settlement obligations expected require use working capital 1994 company intent ability refinance debt longterm basis consolidated longterm debt maturing five years december 31 1993 follows 1994167 199589 199693 1997435 1998198 note 16 employee benefit plans pension plans company defined benefit pension plans employees principal plans provide automatic membership noncontributory basis retirement benefits provided plans based primarily years service average career earnings highest consecutive three years average earnings companys policy fund least minimum necessary satisfy requirements employee retirement income security act fs26 note 16 employee benefit plans continued net pension expense credit companys pension plans years 1993 1992 1991 consisted 1993 1992 1991 cost benefits earned year 103 106 100 interest cost projected benefit obligations 276 302 295 actual return plan assets 472 309 799 net amortization deferral 101 134 346 net pension expense credits 8 35 58 addition net pension expense 1993 company recognized net settlement loss 63 curtailment loss 4 reflecting termination former gulf pension plan lumpsum payments company pension plans 1992 company recorded charges 65 curtailment loss 7 offset net lumpsum settlement gains 101 related early retirement program offered employees us certain canadian subsidiaries 1991 charges 154 related early retirement programs lump sum settlement gains 25 recognized december 31 1993 1992 weighted average discount rates longterm rates compensation increases used estimating benefit obligations expected rates return plan assets follows 1993 1992 assumed discount rates 74 81 assumed rates compensation increases 51 55 expected return plan assets 91 92 pension plans assets consist primarily common stocks bonds cash equivalents interests real estate investment funds funded status companys combined plans december 31 1993 1992 follows plans assets accumulated excess benefits accumulated excess benefits plan assets december 31 1993 1992 1993 1992 actuarial present value vested benefit obligations 2854 2869 183 161 accumulated benefit obligations 2949 2947 194 168 projected benefit obligations 3456 3395 229 184 plan assets fair values 3831 3893 1 6 plan assets greater less projected benefit obligations 375 498 228 178 unrecognized net transition assets liabilities 349 426 20 22 unrecognized net losses 41 17 74 34 unrecognized prior service costs 84 85 7 minimum liability adjustment 52 net pension cost prepaid accrued 151 174 179 174 net transition assets liabilities generally amortized straightline method 15 years profit sharingsavings plan savings plus plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan savings plus plan charges expense profit sharing part profit sharingsavings plan savings plus plan 95 84 104 1993 1992 1991 respectively employee stock ownership plan esop december 1989 company established esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 141 million previously unissued shares companys common stock esop provides partial prefunding companys future commitments profit sharing part plan result annual income tax savings company interest principal payments made esop debt shares released suspense account allocated profit sharing accounts plan participants esop expected satisfy companys obligations profit sharing part profit sharingsavings plan next 11 years company obligations profit sharing part plan satisfied cash contributions company recorded expense esop 60 50 44 1993 1992 1991 respectively including 74 75 69 interest expense related esop loan dividends paid shares held esop used service esop debt dividends used 47 35 40 1993 1992 1991 respectively management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip makes outright distributions cash services rendered deferred awards form stock units awards ltip may take form limited stock options restricted stock units nonstock grants stock options become exercisable earlier one year later 10 years date grant maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year december 31 1993 2151505 shares option exercise prices ranging 63875 8775 per share stock option transactions 1993 1992 follows fs27 note 16 employee benefit plans continued december 31 thousands shares 1993 1992 outstanding january 1 1967 1265 granted 706 725 exercised 509 6 forfeited 12 17 outstanding december 31 2152 1967 exercisable december 31 1456 1250 charges expense combined management incentive plans 36 20 37 1993 1992 1991 respectively benefit plans addition providing pension benefits company makes contributions toward certain health care life insurance plans active qualifying retired employees substantially employees united states certain international locations may become eligible coverage benefit plans companys annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed per capita amount life insurance benefits paid company annual contributions based actual plan experience sfas 106 adopted effective january 1 1992 companys net postretirement benefits expense follows 1993 1992 health life total health life total cost benefits earned year 23 3 26 23 4 27 interest cost benefit obligation 76 30 106 70 30 100 net postretirement benefits expense 99 33 132 93 34 127 1991 expense cash method 60 nonpension postretirement benefits funded company incurred reconciliation funded status benefit plans follows december 31 1993 december 31 1992 health life total health life total accumulated postretirement benefit obligation apbo retirees 593 320 913 598 281 879 fully eligible active participants 139 64 203 109 47 156 active participants 271 56 327 272 49 321 total apbo 1003 440 1443 979 377 1356 fair value plan assets apbo greater plan assets 1003 440 1443 979 377 1356 unrecognized net loss gain 63 25 88 69 12 57 accrued postretirement benefit costs 940 415 1355 910 389 1299 measurement purposes separate health care costtrend rates utilized preage 65 postage 65 retirees 1994 annual rates increase assumed 80 percent 89 percent respectively decreasing average ultimate rates 59 percent 1997 preage 65 54 percent 1997 postage 65 increase assumed health care costtrend rates 1 percent year would increase aggregate service interest cost year 1993 19 would increase december 31 1993 accumulated postretirement benefit obligation apbo 166 december 31 1993 weighted average discount rate 725 percent assumed rate compensation increase related measurement life insurance benefit 50 percent fs28 note 17 contingent liabilities commitments us federal income tax california franchise tax liabilities company settled 1976 1987 respectively settlement open tax matters expected material effect consolidated financial position company opinion management adequate provision made income franchise taxes years either examination subject future examination internal revenue service irs asserted tax deficiencies three stockholders arabian american oil co aramco regarding pricing crude oil purchased saudi arabia period 1979 1981 december 1993 us tax court ruled favor exxon texaco issue known irs appeal decision irs may late 1995 appeal since tax issues related 197981 period must resolved chevron received proposed tax deficiency concerning issue july 1991 irs issued designated summons requires chevron produce additional documents connection saudi pricing issue designated summons extends statutory period assessing additional tax directed district court chevron completed production documents yearend 1993 motions regarding compliance summons expected 1994 chevron complies summons irs may propose tax deficiencies similar asserted aramco stockholders company believes properly accounted saudi crude tax return owes additional us taxes december 31 1993 company subsidiaries direct indirect guarantors contingent liabilities 234 notes affiliated companies 45 notes others company subsidiaries certain contingent liabilities respect guarantees claims longterm commitments various agreements payments future commitments material aggregate september 1990 minerals management service us department interior service issued preliminary determination letter effect company owed additional royalty payments natural gas company produced federal leasehold interests sold longterm supply contracts company made royalty payments based contract price received rather basis published weighted average gas prices higher company submitted answer refuting preliminary determination service matter review rendered order directing payment however parties continuing explore settlement march 1992 agency within department energy doe issued proposed remedial order pro claiming chevron failed comply doe regulations course participation tertiary incentive program although doe regulations involved rescinded march 1981 following decontrol crude oil prices january 1981 statute authorizing regulations expired september 1981 pro purports period april 1980 april 1990 doe claims company overrecouped regulations 125 period question including interest december 1993 total claim amounted 273 company asserts fact incurred loss participation doe program office hearings appeals granted chevrons motion evidentiary hearing discovery date yet set evidentiary hearing company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances company parties contingencies may exist various sites including limited superfund sites operating refineries closed refineries oil fields service stations terminals land development areas amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable insurance companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys related operations results carefully considered management evaluating level current future activity countries areas company significant operations include united states australia united kingdom canada nigeria angola papua new guinea china indonesia zaire companys caltex affiliates significant operations indonesia japan korea australia philippines thailand south africa companys tengizchevroil affiliate operates kazakhstan fs29 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities sfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables first three tables provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows geographic category includes activities united kingdom north sea canada papua new guinea australia countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia tengizchevroil tco exploration production company operating republic kazakhstan began operations april 1993 table costs incurred exploration property acquisitions development 1 consolidated companies millions affiliated dollars us africa total companies worldwide year ended december 31 1993 exploration wells 123 57 126 306 1 307 geological geophysical 12 40 92 9 101 rentals 48 7 70 125 total exploration 183 104 236 523 10 533 property acquisitions 2 proved 3 12 14 26 276 302 unproved 11 9 10 30 420 450 total property acquisitions 23 9 24 56 696 752 development 475 239 566 1280 171 1451 total costs incurred 681 352 826 1859 8774 2736 year ended december 31 1992 exploration wells 96 59 83 238 1 239 geological geophysical 84 48 137 269 8 277 rentals 9 1 21 31 total exploration 189 108 241 538 9 547 property acquisitions 2 proved 3 19 36 55 unproved 16 1 10 27 total property acquisitions 35 1 46 82 development 483 189 682 1354 171 1525 total costs incurred 707 298 969 1974 180 2154 year ended december 31 1991 exploration wells 205 65 150 420 1 421 geological geophysical 98 45 164 307 8 315 rentals 18 2 8 28 2 30 total exploration 321 112 322 755 11 766 property acquisitions 2 proved 3 1 4 5 unproved 59 8 33 100 total property acquisitions 59 9 37 105 development 665 152 569 1386 164 1550 total costs incurred 1045 273 928 2246 175 2421 1 includes costs incurred whether capitalized charged earnings excludes support equipment expenditures 2 proved amounts include wells equipment facilities associated proved reserves unproved represents amounts equipment facilities associated production proved reserves 3 include properties acquired property exchanges 4 1993 total costs incurred affiliated companies includes 146 cpi fs30 table ii capitalized costs relating oil gas producing activities consolidated companies affiliated millions dollars us africa total companies worldwide december 31 1993 unproved properties 404 31 206 641 420 1061 proved properties related producing assets 15655 1528 4646 21829 1005 22834 support equipment 750 105 303 1158 546 1704 deferred exploratory wells 139 23 60 222 uncompleted projects 269 296 879 1444 466 1910 gross capitalized costs 17217 1983 6094 25294 2437 27731 unproved properties valuation 280 20 103 403 proved producing properties depreciation depletion 9645 799 2467 12911 386 13297 future abandonment restoration 1002 195 276 1473 13 1486 support equipment depreciation 338 52 149 539 238 777 accumulated provisions 11265 1066 2995 15326 637 15963 net capitalized costs 5952 917 3099 9968 1800 11768 december 31 1992 unproved properties 481 23 217 721 proved properties related producing assets 15682 1358 4087 21127 622 21749 support equipment 685 92 270 1047 374 1421 deferred exploratory wells 100 30 66 196 1 197 uncompleted projects 443 203 910 1556 368 1924 gross capitalized costs 17391 1706 5550 24647 1365 26012 unproved properties valuation 327 17 110 454 proved producing properties depreciation depletion 9276 700 2225 12201 335 12536 future abandonment restoration 967 168 226 1361 13 1374 support equipment depreciation 296 50 133 479 218 697 accumulated provisions 10866 935 2694 14495 566 15061 net capitalized costs 6525 771 2856 10152 799 10951 december 31 1991 unproved properties 658 24 389 1071 proved properties related producing assets 18088 1212 3925 23225 534 23759 support equipment 658 90 212 960 347 1307 deferred exploratory wells 109 50 124 283 1 284 uncompleted projects 528 179 656 1363 322 1685 gross capitalized costs 20041 1555 5306 26902 1204 28106 unproved properties valuation 429 12 110 551 proved producing properties depreciation depletion 10322 613 2166 13101 299 13400 future abandonment restoration 1024 147 216 1387 12 1399 support equipment depreciation 262 60 117 439 203 642 accumulated provisions 12037 832 2609 15478 514 15992 net capitalized costs 8004 723 2697 11424 690 12114 december 31 1993 net capitalized costs affiliated companies includes 860 cpi fs31 unaudited table iii results operations oil gas producing activities 1 companys results operations oil gas producing activities years 1993 1992 1991 shown net income exploration production activities reported page fs6 includes allocation corporate overhead income taxes computed effective rate basis accordance sfas 69 allocated corporate overhead excluded results income taxes based statutory tax rates reflecting allowable deductions tax credits interest expense excluded reported results consolidated companies affiliated millions dollars us africa total companies worldwide year ended december 31 1993 revenues net production sales 1539 247 779 2565 63 2628 transfers 1912 1040 661 3613 487 4100 total 3451 1287 1440 6178 550 6728 production expenses 1274 208 402 1884 204 2088 proved producing properties depreciation depletion abandonment provision 958 126 311 1395 58 1453 exploration expenses 99 79 174 352 9 361 unproved properties valuation 31 4 12 47 income expense 2 20 8 28 6 34 results income taxes 1109 870 549 2528 285 2813 income tax expense 422 625 243 1290 152 1442 results producing operations 687 245 306 1238 133 1371 year ended december 31 1992 revenues net production sales 1558 365 816 2739 19 2758 transfers 2301 1097 580 3978 519 4497 total 3859 1462 1396 6717 538 7255 production expenses 1477 194 508 2179 153 2332 proved producing properties depreciation depletion abandonment provision 1126 110 301 1537 38 1575 exploration expenses 182 79 226 487 8 495 unproved properties valuation 38 5 17 60 income expense 2 431 27 72 530 15 515 results income taxes 1467 1101 416 2984 324 3308 income tax expense 420 856 231 1507 170 1677 results producing operations 1047 245 185 1477 154 1631 year ended december 31 1991 revenues net production sales 1609 268 694 2571 20 2591 transfers 2364 1138 778 4280 563 4843 total 3973 1406 1472 6851 583 7434 production expenses 1870 149 439 2458 148 2606 proved producing properties depreciation depletion abandonment provision 1259 100 252 1611 35 1646 exploration expenses 220 92 298 610 10 620 unproved properties valuation 77 3 21 101 income expense 2 107 5 117 219 15 204 results income taxes 654 1057 579 2290 375 2665 income tax expense 246 894 403 1543 212 1755 results producing operations 408 163 176 747 163 910 1993 results producing operations affiliated companies includes 134 cpi fs32 table iii results operations oil gas producing activities 1 continued per unit average consolidated companies sales price production affiliated cost 1 3 us africa total companies worldwide year ended december 31 1993 average sales prices liquids per barrel 1448 1621 1606 1533 1306 1505 natural gas per thousand cubic feet 198 208 200 13 199 average production costs per barrel 491 262 422 434 477 438 year ended december 31 1992 average sales prices liquids per barrel 1602 1840 1766 1700 1487 1677 natural gas per thousand cubic feet 169 196 173 average production costs per barrel 511 244 585 478 423 474 year ended december 31 1991 average sales prices liquids per barrel 1673 1900 1836 1763 1525 1736 natural gas per thousand cubic feet 153 224 163 average production costs per barrel 629 201 510 537 387 526 average sales price liquids bbl december 1993 1073 1294 1363 1205 1046 1182 december 1992 1522 1760 1726 1635 1415 1607 december 1991 1508 1739 1876 1643 1438 1619 average sales price natural gas mcf december 1993 219 234 221 26 220 december 1992 217 199 214 december 1991 193 251 200 1 value owned production consumed fuel eliminated revenues production expenses related volumes deducted net production calculating per unit average sales price production cost effect amount results producing operations 2 includes gasprocessing fees net sulfur income natural gas contract settlements currency transaction gains losses miscellaneous expenses etc 1993 united states includes beforetax losses property dispositions special charges totaling 150 1992 beforetax gains property dispositions 326 united states offset partially net charges 44 severance programs regulatory issues adjustments includes 192 beforetax gains sales producing nonproducing properties partially offset beforetax charge 165 writedown beaufort sea properties 1991 losses property dispositions united states offset favorable adjustments litigation reserves geographic segment included 89 beforetax gains property dispositions 3 natural gas converted crude oil equivalent gas oeg barrels rate 6 mcf1 oeg barrel table iv reserve quantities information companys estimated net proved underground oil gas reserves changes thereto years 1993 1992 1991 shown following table quantities estimated companys reserves engineers reviewed companys reserves advisory committee using reserve definitions prescribed securities exchange commission proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change time additional information becomes available proved reserves include additional quantities recoverable beyond term lease contract unless renewal reasonably certain may result extensions currently proved areas application secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate upon formation tengizchevroil joint venture april 1993 company recognized 11 billion barrels net proved crude oil natural gas liquids reserves 15 trillion cubic feet net natural gas reserves represented 50 percent ownership fs33 unaudited table iv reserve quantities information continued table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing future production proved reserves timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs34 unaudited table v standardized measure discounted future net cash flows related proved oil gas reserves continued table vi changes standardized measure discounted future net cash flows proved reserves fs35 fiveyear financial summary 1 fs36 caltex group companies combined financial statements schedules december 31 1993 c1 caltex group companies combined financial statements schedules december 31 1993 index schedule number pages general information c3 c4 independent auditors report c5 combined balance sheet c6 c7 combined statement income c8 combined statement retained earnings c9 combined statement cash flows c9 notes combined financial statements c10 c19 property plant equipment v c20 accumulated depreciation depletion amortization vi c21 note schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc private joint venture created bahrain 1936 two owners produce refine market crude oil refined products headquartered irving texas group comprised following companies caltex petroleum corporation company incorporated delaware many subsidiaries affiliates conducts refining marketing activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas subsidiaries manages certain exploration production operations indonesia chevron texaco interests necessarily jointly properties brief description companys operations groups environmental activities follows caltex petroleum corporation caltex subsidiaries affiliates caltex operates 63 countries highest economic petroleum growth rates world principally africa asia middle east new zealand australia certain refining marketing operations conducted joint ventures equity interests 14 refineries 11 countries caltex share refinery inputs approximated 869000 barrels per day 1993 caltex continues improve refineries investments designed provide higher yields meet environmental regulations construction new 130000 barrels per day refinery thailand progressing completion anticipated 1996 year end 1993 caltex 7800 employees 3 located united states strong presence principal operating areas caltex average market share 173 refined product sales approximately 13 million barrels per day 1993 caltex built 130 new branded retail outlets 1993 refurbished 294 existing locations aim upgrade retail distribution network caltex conducts international crude oil refined product logistics trading operations subsidiary singapore offices located london bahrain tokyo company interest fleet vessels owns equity interests numerous pipelines terminals depots currently caltex active petrochemical business particularly japan south korea p caltex pacific indonesia cpi holds production sharing contract central sumatra indonesian government granted extension year 2021 1992 cpi also acts operator four petroleum contract areas sumatra jointly held chevron texaco exploration pursued throughout area comprising 2446 million acres production established giant minas duri fields along 80 smaller fields gross production fields operated cpi 1993 674000 barrels per day cpi entitlements sold shareholders use systems sell third parties addition 1993 cpi began gas exploration activities nias block held jointly chevron texaco year end 1993 cpi 6400 employees located indonesia c3 caltex group companies general information american overseas petroleum limited aopl addition coordinating cpi activities aopl subsidiary amoseas indonesia inc manages texacos chevrons undivided interest holdings include ten contract areas indonesia excluding sumatra production currently established two contract areas exploration pursued seven others one darajat west java contains geothermal reserves sufficient supply 55megawatt power generating plant 30 years production geothermal reserves expected begin 1994 state owned utility company completes construction associated power station aopls 1993 share production amounted 38400 barrels per day year end aopl 281 employees 15 located united states environmental activities groups activities subject environmental health safety regulations countries operates regulations vary significantly degree scope standards enforcement groups policy comply applicable environmental health safety laws regulations group active program ensure environmental standards maintained includes closely monitoring applicable statutory regulatory requirements well enforcement policies countries operates conducting periodic environmental compliance audits december 31 1993 group accrued 12 million various remediation activities environmental guidelines definitions promulgated american petroleum institute provide basis reporting groups expenditures year ended december 31 1993 group including equity share nonsubsidiary companies incurred capital costs 147 million nonremediation related operating expenses 92 million major component groups expenditures prevention air pollution based upon existing statutory regulatory requirements investment operating plans known exposures group believes environmental expenditures materially affect liquidity financial position results operations c4 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1993 1992 related combined statements income retained earnings cash flows years threeyear period ended december 31 1993 connection audits combined financial statements also audited financial statement schedules listed accompanying index combined financial statements financial statement schedules responsibility groups management responsibility express opinion combined financial statements financial statement schedules based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1993 1992 results operations cash flows years threeyear period ended december 31 1993 conformity generally accepted accounting principles also opinion related financial statement schedules considered relation basic combined financial statements taken whole present fairly material respects information set forth therein discussed notes 1 6 combined financial statements effective january 1 1992 group adopted provisions financial accounting standards boards statements financial accounting standards 106 employers accounting postretirement benefits pensions 109 accounting income taxes kpmg peat marwick dallas texas february 15 1994 consent independent public accountants hereby consent incorporation reference prospectuses constituting part registration statements form s3 298466 form s8 nos 333899 3334039 3335283 chevron corporation incorporation reference prospectus constituting part registration statement form s3 3314307 chevron capital usa inc chevron corporation incorporation reference registration statement form s3 3358838 chevron canada finance limited chevron corporation incorporation reference registration statement form s8 290907 caltex petroleum corporation report dated february 15 1994 relating combined balance sheets caltex group companies december 31 1993 1992 related combined statements income retained earnings cash flows related financial statement schedules years threeyear period ended december 31 1993 report appears december 31 1993 annual report form 10k chevron corporation kpmg peat marwick dallas texas march 25 1994 c5 caltex group companies combined balance sheet december 31 1993 1992 millions dollars assets 1993 1992 current assets cash equivalents including time deposits 64 1993 121 1992 166 239 notes accounts receivable less allowance doubtful accounts 14 1993 15 1992 trade 950 1020 155 115 nonsubsidiary companies 112 173 1217 1308 inventories crude oil 148 239 refined products 532 512 materials supplies 56 55 736 806 deferred income taxes 4 25 total current assets 2123 2378 investments advances nonsubsidiary companies equity 1796 1427 miscellaneous investments longterm receivables less allowance 7 1993 1992 195 173 1991 1600 property plant equipment cost producing 3027 2783 refining 1483 1259 marketing 2252 2107 marine 35 capitalized leases 119 113 6916 6297 less accumulated depreciation depletion amortization 2878 2628 4038 3669 prepaid deferred charges 237 216 total assets 8389 7863 see accompanying notes combined financial statements c6 caltex group companies combined balance sheet december 31 1993 1992 millions dollars liabilities stockholders equity 1993 1992 current liabilities notes payable banks financial institutions 966 830 longterm debt due within one year 51 accounts payable trade 967 1081 stockholder companies 87 229 nonsubsidiary companies 149 76 1203 1386 accrued liabilities 86 91 estimated income taxes 105 95 total current liabilities 2411 2453 longterm debt capital lease obligations 530 486 accrued liability employee benefits 98 92 deferred credits 646 605 deferred income taxes 263 270 minority interest subsidiary companies 146 138 stockholders equity common stock 355 additional paidin capital 2 retained earnings 3688 3310 currency translation adjustment 250 152 total stockholders equity 4295 3819 commitments contingent liabilities total liabilities stockholders equity 8389 7863 see accompanying notes combined financial statements c7 caltex group companies combined statement income years ended december 31 1993 1992 1991 millions dollars 1993 1992 1991 sales operating revenues 1 15409 17281 15445 operating charges cost sales operating expenses 2 13431 15348 13394 selling general administrative expenses 496 479 444 depreciation depletion amortization 295 263 257 maintenance repairs 170 165 156 14392 16255 14251 operating income 1017 1026 1194 income deductions equity net income nonsubsidiary companies 140 163 188 dividends interest income 99 83 288 foreign exchange net 23 21 5 interest expense 93 102 131 minority interest subsidiary companies 8 13 8 161 152 332 income provision income taxes cumulative effects changes accounting principles 1178 1526 provision income taxes current 433 456 649 deferred 25 53 38 total provision income taxes 458 509 687 income cumulative effects changes accounting principles 720 669 839 cumulative effects changes accounting principles 51 net income 720 839 1 includes sales stockholder companies 907 835 1124 nonsubsidiary companies 2684 3075 2610 2 includes purchases stockholder companies 3333 3917 3181 nonsubsidiary companies 2618 2198 2217 see accompanying notes combined financial statements c8 caltex group companies combined statement retained earnings years ended december 31 1993 1992 1991 millions dollars 1993 1992 1991 balance beginning year 3310 2955 2518 net income 720 839 cash dividends 342 365 402 balance end year 3688 3310 2955 combined statement cash flows years ended december 31 1993 1992 1991 millions dollars 1993 1992 1991 operating activities net income 720 839 adjustments reconcile net income net cash provided operating activities cumulative effects changes accounting principles 51 depreciation depletion amortization 295 263 257 dividends nonsubsidiary companies less equity net income 103 133 162 asset sales 4 200 deferred income taxes 25 53 38 prepaid charges deferred credits 41 25 45 changes operating working capital 31 58 127 10 46 5 net cash provided operating activities 933 769 949 investing activities capital expenditures 763 711 640 investments advances nonsubsidiary companies 149 17 1 net purchases investment instruments 21 11 14 proceeds asset sales 73 144 85 net cash used investing activities 860 595 570 financing activities proceeds borrowings original terms excess three months 745 831 643 repayments borrowings original terms excess three months 704 857 553 net increase decrease borrowings 140 94 37 dividends paid including minority interest 342 365 407 net cash used financing activities 161 297 354 effect exchange rate changes cash equivalents 15 8 17 net change cash equivalents 73 131 8 cash equivalents beginning year 239 370 362 cash equivalents end year 166 239 370 see accompanying notes combined financial statements c9 caltex group companies notes combined financial statements 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex petroleum corporation subsidiaries american overseas petroleum limited subsidiaries pt caltex pacific indonesia elimination intercompany balances transactions subsidiary chevron corporation two subsidiaries texaco inc stockholders 50 outstanding common shares group primarily engaged exploring producing refining marketing crude oil refined products eastern hemisphere group employs accounting policies accordance generally accepted accounting principles united states translation foreign currencies us dollar functional currency principal subsidiary operations nonsubsidiary companies japan korea use local currency functional currency inventories crude oil refined product inventories stated lower cost primarily determined lastin firstout lifo method current market value costs include applicable purchase refining costs duties import taxes freight etc materials supplies valued average cost investments advances investments advances nonsubsidiary companies 20 50 voting stock owned group ability exercise significant influence accounted equity method groups equity earnings losses companies included current results related investments reflect equity book value underlying net assets investments nonsubsidiary companies carried cost related dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing area including intangible development costs computed using unitofproduction method assets depreciated class uniform straight line basis depreciation rates based upon estimated useful life class property view numerous depreciation classifications practical provide schedule depreciation rates maintenance repairs necessary maintain facilities operating condition charged income incurred additions betterments materially extend life properties capitalized upon disposal properties net gain loss included income c10 caltex group companies notes combined financial statements 1 summary significant accounting policies continued deferred income taxes effective january 1 1992 deferred income taxes recognized according asset liability method specified statement financial accounting standards sfas 109 accounting income taxes applying individual jurisdiction tax rates applicable future years differences financial statement tax basis carrying amounts assets liabilities effect tax rate changes previously recorded deferred taxes recognized current year deferred income taxes 1991 recognized method specified sfas 96 provision made possible income taxes might payable accumulated earnings subsidiary companies nonsubsidiary companies accounted equity method distributed since earnings intended indefinitely reinvested environmental matters compliance environmental regulations determined relation existing laws countries group operates groups internal standards group capitalizes expenditures create future benefits contribute future revenue generation remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available nondiscounted estimated costs using data developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realization determined probable reclassifications certain amounts reclassified preceding periods conform current years presentation 2 inventories excess current cost stated value inventory maintained lifo basis approximately 40 million 91 million december 31 1993 1992 respectively reduction lifo inventories certain countries resulted increase earnings consolidated subsidiaries nonsubsidiary companies equity approximately 1 million 1993 previous reductions lifo inventories resulted decrease earnings 2 million 1992 increase earnings 4 million 1991 charges 104 million 25 million reduced income 1993 1991 respectively reflect market value certain inventories lower lifo carrying value earnings 14 million recorded 1992 reflect partial recovery 1991 charge c11 caltex group companies notes combined financial statements 3 nonsubsidiary companies equity investments advances nonsubsidiary companies equity december 31 include following millions equity share 1993 1992 nippon petroleum refining company ltd 50 829 727 koa oil company ltd 50 310 268 honam oil refinery company ltd 50 423 357 various 234 75 1796 1427 shown summarized combined financial information non subsidiary companies millions 100 equity share 1993 1992 1993 1992 current assets 4680 5149 2316 2564 assets 6147 4851 2975 2410 current liabilities 4900 4946 2349 2470 liabilities 2306 2173 1146 1078 net worth 3621 2881 1796 1426 100 equity share 1993 1992 1991 1993 1992 1991 operating revenues 10679 10502 10267 5304 5216 5102 operating income 494 645 839 242 319 416 net income 281 326 380 140 163 188 retained earnings december 31 1993 includes 12 billion representing groups share undistributed earnings nonsubsidiary companies equity cash dividends received nonsubsidiary companies 37 million 30 million 26 million 1993 1992 1991 respectively sales 50 percent owner nippon petroleum refining company ltd products refined nippon petroleum refining company ltd koa oil company ltd approximately 19 billion 2 billion 21 billion 1993 1992 1991 respectively c12 caltex group companies notes combined financial statements 4 notes payable information regarding shortterm financing consisting primarily demand loans promissory notes acceptance credits overdrafts shown dollars millions weighted maximum weighted average outstanding average interest rate borrowings interest rate amount average year end year end month end outstanding 1993 966 47 1041 902 46 1992 830 50 1063 898 57 1991 907 72 996 875 99 unutilized lines credit available shortterm financing totaled 814 million december 31 1993 5 longterm debt capital lease obligations longterm debt capital lease obligations related interest rates december 31 1993 consist following millions 1993 1992 us dollars variable interest rate term loans 173 155 fixed interest rate term loans 76 average rate 220 205 australian dollars debentures interest rates 125 due 1995 1996 8 11 promissory notes payable 49 average rate 76 65 capital lease obligations 33 new zealand dollars term loans interest rates 6 635 due 19961997 14 6 17 530 486 december 31 1993 1992 101 million 110 million respectively notes payable classified longterm debt settlement obligations expected require use working capital 1994 group intent ability refinance debt long term basis december 31 1993 1992 101 million 110 million respectively longterm committed credit facilities available major banks support notes payable classified longterm debt maturities subsequent december 31 1993 follow millions 1994 51 included combined balance sheet current liability 1995 151 1996 147 1997 37 1998 86 1999 thereafter 109 c13 caltex group companies notes combined financial statements 6 employee benefits group retirement plans covering substantially eligible employees generally plans provide defined benefits based final average pay defined benefit levels vesting terms funding practices vary among plans funded status retirement plans primarily foreign inclusive nonsubsidiary companies equity december 31 follows millions assets exceed accumulated benefits funding status benefits exceed assets 1993 1992 1993 1992 actuarial present value vested benefit obligation 280 240 117 100 accumulated benefit obligation 309 264 137 117 projected benefit obligation 484 432 195 170 amount assets available benefits funded assets fair value 450 403 39 26 net pension asset liability recorded 11 8 128 123 total assets 439 395 167 149 assets less projected benefit obligation 45 37 28 21 consisting unrecognized transition net assets liabilities 31 38 2 4 unrecognized net losses 44 42 23 16 unrecognized prior service costs 32 33 3 1 weighted average rate assumptions discount rate 95 111 65 rate increase compensation 74 90 47 expected return plan assets 103 114 55 49 expenses funded unfunded combined 1993 1992 1991 cost benefits earned year 27 26 21 interest cost projected benefit obligation 58 54 49 actual return plan assets 59 9 64 net amortization deferral 16 38 22 42 33 28 group adopted sfas 106 employers accounting postretirement benefits pensions effective january 1 1992 using immediate recognition option sfas 106 requires accrual employees service group cost retiree health life insurance benefits prior 1992 postretirement benefits included expense benefits paid c14 caltex group companies notes combined financial statements 6 employee benefits continued certain companies within group provide health care life insurance benefits retired employees plans provide benefits unfunded december 31 1993 1992 accumulated postretirement benefit obligation amounted 47 million 43 million respectively related accruals 44 million 43 million respectively net periodic postretirement benefit costs amounted 6 million years ending december 31 1993 1992 november 1992 financial accounting standards board issued sfas 112 employers accounting postemployment benefits new standard requires companies accrue later 1994 cost benefits provided former inactive employees employment prior retirement adoption new standard expected materially impact combined financial statements group 7 operating leases group various operating leases involving service stations equipment facilities net rental expense 110 million 95 million 53 million 1993 1992 1991 respectively future net minimum rental commitments operating leases noncancelable terms excess one year follows millions 1994 42 1995 42 1996 42 1997 37 1998 31 1999 thereafter 146 8 contingent liabilities january 25 1990 caltex petroleum corporation certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer lawsuit filed houston texas state court removal federal district court houston litigations disposition turned questions federal court jurisdiction whether case dismissed forum non conveniens plaintiffs petition purported class action behalf least 3350 parties either survivors next kin persons deceased collision philippine waters december 20 1987 one vessel involved collision carrying group products connection freight contract although group direct indirect ownership operational responsibility either vessel various theories liability alleged group specific monetary recovery sought although petition contained variety demands various categories compensatory well punitive damages issues resolved groups favor federal district court march 1992 decision final however plaintiffs separately filed another lawsuit alleging causes action texas litigation louisiana state court new orleans late 1988 never served group late december 1993 decision texas litigation became final subsequent receipt service group removed case federal district court new orleans moved dismissal management contesting case vigorously possible estimate amount damages involved group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third party insurance c15 caltex group companies notes combined financial statements 8 contingent liabilities continued group also involved certain litigation internal revenue service tax audits could involve significant payments items ultimately resolved adversely group impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position results operations liquidity 9financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk december 31 group commitments outstanding interest rate swaps foreign currency transactions notional contractual amounts follows millions 1993 1992 interest rate swaps 344 317 commitments purchase foreign currencies 338 141 commitments sell foreign currencies 89 20 interest rate swaps intended hedge fluctuations interest rates debt effects recognized statement income time interest expense debt relate commitments purchase sell foreign currencies made provide exchange rate protection specific transactions maximize economic benefit based expected currency movements purchase sale commitments year end exchange rates mature following year commitments marked market resulting gains losses recognized current year income unless contract specific hedge identifiable transaction material differences notional estimated fair value commitments groups longterm debt excluding capital lease obligations 497 million 453 million december 31 1993 1992 respectively fair values 511 million 462 million december 31 1993 1992 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents notes accounts receivable current liabilities approximate fair value short maturity certain group companies contingently liable guarantors 7 million 12 million december 31 1993 1992 respectively group also commitments 36 million 96 million december 31 1993 1992 respectively form letters credit issued behalf group companies facilitate either groups parties ability trade normal course business financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentrations risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer country considered sufficient credit losses historically within managements expectations c16 caltex group companies notes combined financial statements 10 incomedeductions 1991 dividends interest income included gains asset sales tax basis 200 million 120 million respectively asset sales 1993 1992 significant net foreign exchange exclusive currency translation adjustment consolidated subsidiaries nonsubsidiary companies equity applicable income taxes amounted gains 32 million 43 million 1993 1992 respectively gain 1991 less 1 million 11 taxes charged income consist following millions 1993 1992 1991 taxes income taxes duties import excise taxes 1978 1891 1802 29 total taxes income taxes 2007 1920 1831 provision income taxes 458 509 687 2465 2429 2518 provision income taxes substantially foreign computed individual company basis rates effect various countries operation actual tax expense differs expected tax expense computed applying us federal corporate tax rate income provision income taxes follows 1993 1992 1991 computed expected tax expense 350 340 effect recording equity net income nonsubsidiary companies tax basis 42 49 42 effect dividends received subsidiary nonsubsidiary companies 42 38 33 foreign income subject foreign taxes excess us statutory tax rate 74 116 104 decrease deferred tax asset valuation allowance 31 4 9 15 389 432 450 c17 caltex group companies notes combined financial statements 11 taxes continued deferred income taxes provided temporary differences financial reporting basis tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax assets liabilities december 31 1993 1992 follows millions deferred tax assets tax liabilities 1993 1992 1993 1992 inventory 10 27 18 17 depreciation 298 275 retirement plans 33 28 3 2 tax loss carryforwards 29 36 28 30 34 30 100 121 353 324 valuation allowance 6 42 total deferred taxes 94 79 353 324 valuation allowance established record deferred tax assets amounts recoverability likely net income increased 36 million 5 million changes deferred tax asset valuation allowance 1993 1992 respectively undistributed earnings deferred income tax provision made approximated 36 billion december 31 1993 earnings intended indefinitely reinvested earnings would become taxable us upon remittance dividends practical estimate amount tax might payable eventual remittance earnings remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability 12 cash flows purposes statement cash flows highly liquid debt instruments original maturities three months less considered cash equivalents changes operating working capital consists following millions 1993 1992 1991 notes accounts receivable 82 45 418 inventories 66 114 62 accounts payable 147 212 317 accrued liabilities 16 27 2 estimated income taxes 14 84 34 total 31 58 127 c18 caltex group companies notes combined financial statements 12 cash flows continued net cash provided operating activities includes following cash payments interest income taxes millions 1993 1992 1991 interest paid net capitalized interest 92 106 132 income taxes paid 391 528 662 1991 asset sale funded receivables 120 million subsequently collected 1992 significant noncash investing financing transactions occurred 1993 1992 1991 13 investments debt equity securities may 1993 financial accounting standards board issued sfas 115 accounting certain investments debt equity securities new standard requires companies later 1994 classify debt equity securities one three categories heldtomaturity availableforsale trading debt held maturity carried amortized cost certain securities considered availableforsale shall carried fair value unrealized holding gains losses shall carried net amount separate component stockholders equity realized securities classified trading shall carried fair value unrealized holding gains losses shall included earnings adoption new standard materially impact combined financial position results operations group 14 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures equity affiliates accordingly disclosures presented herein c19 caltex group companies schedule v property plant equipment years ended december 31 1993 1992 1991 millions dollars balance addi retire changes balance beginning tions ments add end classification period cost sales deduct period year ended december 31 1993 producing 2783 247 3 3027 refining 1259 237 6 7 1 1483 marketing 2107 262 108 9 2 2252 marine 35 capitalized leases 113 8 2 119 total 6297 754 119 16 6916 year ended december 31 1992 producing 2462 322 1 2783 refining 1111 166 18 1259 marketing 1915 253 46 15 3 2107 marine 55 20 35 capitalized leases 113 total 5656 741 85 15 6297 year ended december 31 1991 producing 2179 284 1 2462 refining 1008 105 2 1111 marketing 1689 243 39 22 1 1915 marine 54 1 55 capitalized leases 111 3 1 113 total 5041 636 43 22 5656 1 reclassification 2 currency translation adjustment 4 reclassification 5 3 currency translation adjustment c20 caltex group companies schedule vi accumulated depreciation depletion amortization years ended december 31 1993 1992 1991 millions dollars additions balance charged retire changes balance beginning costs ments add end classification period expenses sales deduct period year ended december 31 1993 producing 1158 128 1 1285 refining 646 51 6 2 1 689 marketing 736 104 32 2 806 marine 7 2 9 capitalized leases 81 10 2 89 total 2628 295 41 4 2878 year ended december 31 1992 producing 1051 106 1 1158 refining 614 47 15 646 marketing 672 98 25 9 3 736 marine 23 2 18 7 capitalized leases 73 10 2 81 total 2433 263 59 9 2628 year ended december 31 1991 producing 940 111 1051 refining 567 49 2 614 marketing 609 85 22 672 marine 21 2 23 capitalized leases 64 10 1 73 total 2201 257 25 2433 1 reclassification 2 currency translation adjustment 1 reclassification 1 3 currency translation adjustment c21item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs12 consolidated statement income three years ended december 31 1995 fs12 consolidated balance sheet december 31 1995 1994 fs13 consolidated statement cash flows three years ended december 31 1995 fs14 consolidated statement stockholders equity three years ended december 31 1995 fs15 notes consolidated financial statements fs16 fs28 2 financial statement schedules caltex group companies combined financial statements c1 c20 combined financial statements caltex group companies filed part report schedules omitted applicable required information included combined financial statements notes thereto 3 exhibits exhibit index pages 32 33 annual report form 10k lists exhibits filed part report b reports form 8k current report form 8k dated december 6 1995 filed company december 6 1995 report announced registrants 50 percent owned affiliate caltex petroleum corporation caltex signed letter intent sell 50 percent interest nippon petroleum refining company limited caltexs partner nippon oil company limited current report form 8k dated january 4 1996 filed company january 4 1996 report announced registrants adoption fourth quarter 1995 statement financial accounting standards 121 accounting impairment longlived assets longlived assets disposed current report form 8k dated january 22 1996 filed company january 22 1996 report announced registrant ngc corporation signed exclusivity agreement negotiate merger certain natural gas gathering processing marketing operations 30 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day march 1996 chevron corporation kenneth derr kenneth derr chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 27th day march 1996 principal executive officers directors kenneth derr samuel h armacost kenneth derr chairman board samuel h armacost james n sullivan raymond e galvin james n sullivan raymond e galvin vicechairman board sam ginn principal financial officer sam ginn martin r klitten carla hills martin r klitten vicepresident carla hills chief financial officer charles pigott charles pigott principal accounting officer condoleezza rice donald g henderson condoleezza rice donald g henderson vicepresident comptroller john young john young george h weyerhaeuser george h weyerhaeuser lydia beebe lydia beebe attorneyinfact 31 exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated august 2 1994 filed exhibit 31 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 32 bylaws chevron corporation amended july 27 1994 including provisions giving attorneysinfact authority sign behalf officers corporation filed exhibit 32 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 41 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated november 22 1988 incorporated herein reference 42 amendment 1 dated december 7 1989 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated december 7 1989 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective january 1 1990 filed exhibit 101 chevron corporations annual report form 10k 1990 incorporated herein reference 102 management contingent incentive plan chevron corporation amended may 2 1989 filed exhibit 102 chevron corporations annual report form 10k 1989 incorporated herein reference 103 chevron corporation excess benefit plan amended restated july 1 1990 filed exhibit 103 chevron corporations annual report form 10k 1990 incorporated herein reference 104 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 105 chevron restricted stock plan nonemployee directors amended restated effective january 29 1992 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 16 1992 incorporated herein reference 106 chevron corporation longterm incentive plan filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 19 1990 incorporated herein reference 121 computation ratio earnings fixed charges page e1 211 subsidiaries chevron corporation page e2 231 consent price waterhouse llp page e3 32 exhibit index continued exhibit description 232 consent kpmg peat marwick llp page e4 241 powers attorney directors certain officers chevron corporation authorizing signing annual report form 10k 2412 behalf 271 financial data schedule 991 definitions selected financial terms page e5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 575 market street san francisco california 94105 33 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs1 fs10 quarterly results stock market data fs11 report management fs11 report independent accountants fs12 consolidated statement income fs12 consolidated balance sheet fs13 consolidated statement cash flows fs14 consolidated statement stockholders equity fs15 notes consolidated financial statements fs16 fs28 supplemental information oil gas producing activities fs29 fs34 fiveyear financial summary fs35 34 managements discussion analysis financial condition results operations key financial results millions dollars except pershare amounts 1995 1994 1993 sales operating revenues 36310 35130 36191 net income 930 1693 1265 special charges credits included net income 1032 22 883 per share net income 143 260 194 dividends 1925 185 175 return average capital employed 53 87 68 average stockholders equity 64 118 91 chevrons net income 1995 930 million substantially 1693 billion 1994 1265 billion 1993 however special items particularly 1995 1993 new accounting standard asset impairment adopted 1995 affected comparability companys reported results special items new accounting standard related tax effects decreased reported earnings 1032 billion 1995 883 million 1993 increasing earnings 22 million 1994 excluding effects new accounting standard 1995 special items years operating earnings 1962 billion 1995 17 percent 1671 billion earned 1994 9 percent 1993s operating earnings 2148 billion operating environment outlook four years declining crude oil prices chevrons crude oil realizations increased 1995 companys us realizations averaged 148 per barrel higher 1994 international realizations 124 however worldwide crude oil supplies continue plentiful expected remain foreseeable future nonopec crude oil sources proliferated opec member countries continue influence crude oil prices production levels hand us natural gas prices continued decline falling average 26 cents per thousand cubic feet 151 supplies commodity continue exceed demand heavily dependent weather conditions price alternate fuels fuel oil companys international gas realizations also average 11 cents per thousand cubic feet 173 industry refined product sales margins continued weak worldwide throughout year us refining margins especially low gulf coast region marketing margins weak gulf west coasts ample supplies competitive marketplace prevented product prices fully reflecting higher crude oil costs reasons held product prices companys international refining marketing areas united kingdom canada caltex affiliate asiapacific region addition chevrons us refining operations negatively affected significant refinery downtime 1995 planned major maintenance lesser extent unplanned downtime due refinery problems companys richmond california refinery much fourth quarter upgrades required produce californiamandated cleanerburning gasolines chemicals industry continued strengthen 1995s first half strong demand translated higher prices increased sales volumes chevrons olefins aromatics products favorable conditions peaked midyear softened throughout second half 1995 1996 also companys port arthur texas ethylene unit unplanned maintenance early 1996 company expect 1996 chemicals results strong 1995s unusually cold weather eastern central united states late 1995 1996 pushed natural gas prices sharply higher due increased heating demand low customer inventory levels crude oil prices also rose increased heating oil demand henry hub natural gas spot price industry marker 291 per thousand cubic feet yearend 1995 continued increase 1996 retreated 272 late february 1996 chevrons posted price west texas intermediate wti benchmark crude oil 1850 per barrel yearend 1995 1800 february 23 1996 chevron major refinery maintenance scheduled 1996 positioned refine market california cleanerburning gasolines mandated second quarter weak industry sales margins continued 1996 uncertain whether increased cost manufacturing fuels initially recovered marketplace also customer acceptance new gasolines together overall industry supply demand situation could affect companys 1996 results company continues review operations improve competitiveness profitability 1995 decision made exit real estate development business noncore activity located california completion sale properties expected first half 1996 us gasoline marketing reorganized efficiently serve customer combining regional offices consolidating support functions international us trading lubricants businesses integrated global organizations chemicals operations reorganized geographic areas facilitate international growth two staff functions human resources finance adopting shared services approach provide support chevron organizations new financial information system installed throughout company initiatives intended help company accomplish strategic intents effectively lower cost december 1995 chevron entered service agreement maraven subsidiary venezuelas national oil fs1 company operate develop boscan heavy oil field venezuela field currently produces 80000 barrels per day operator chevron receive perbarrel fee concurrently agreements entered supply heavy crude oil four chevron us refineries form joint venture maraven market chevronmade asphalt western united states activities expected full operation mid1996 caltex chevrons 50 percentowned refining marketing affiliate selling 50 percent interest refining company japan partner nippon oil company 2 billion sale result significant gain expected completed first half 1996 sales proceeds expected fund dividends stockholders help fund caltex expansion projects highergrowth areas asiapacific region caltexs new grassroots refinery thailand scheduled completion mid1996 january 1996 chevron announced intent merge substantially us natural gas liquids natural gas marketing businesses ngc corporation company believes merger position activities greater growth agreement reached transaction expected completed midyear chevron common preferred stock holdings approximate 28 percent equity interest resulting company north americas largest natural gas marketer well largest processor marketer natural gas liquids addition chevron expects negotiate separate agreements new company market chevrons north american natural gas production provide energy feedstock requirements refineries chemicals facilities international exploration production developments production tengizchevroil tco 50 percentowned joint venture republic kazakstan continues constrained lack sufficient export capability 1995 liquids production averaged 58000 barrels per day 46000 1994 year end daily production 64000 barrels crude oil production capacity currently 95000 barrels per day significantly less fields potential field development dependent upon availability additional export capability securing marketing alternatives partners remain committed realizing full potential project developing additional markets continue explore political commercial solutions export situation chevrons cash investment tco yearend 1995 717 million chevron significant oilproducing properties major development projects way nigeria angolas cabinda exclave continue experience political uncertainty civil unrest although operations generally unaffected company continues closely monitor developments 1995 chevrons net share production averaged 133000 118000 barrels per day nigeria angola respectively prior years chevrons partner nigeria governmentowned nigerian national petroleum corporation nnpc fallen behind paying cash calls chevron oil companies operating nigeria 1995 nnpc made considerable progress bringing payments morecurrent basis respective participants uk norwegian sectors north sea statfjord field unable agree equity redetermination field submitted matter resolution independent expert chevrons share 1995 production statfjord 28000 oil equivalent gas barrels per day 1995 environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern manner company conducts operations also products sells costs complying myriad laws regulations pertaining operations products embedded normal costs conducting business using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1995 1442 billion consolidated companies included expenditures 663 million environmental capital expenditures 779 million costs associated control abatement hazardous substances pollutants ongoing operations total amount also includes spending charged reserves established prior years environmental cleanup programs noncash provisions increase reserves establish new ones year addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various current previously owned facilities wastedisposal sites obligation take remedial action may incurred result enactment laws federal superfund law issuance new regulations result companys policies area accidental leaks spills requiring cleanup may occur ordinary course business addition obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable standards existing time require investigatory andor remedial work meet current standards 1995 company recorded 140 million beforetax provisions 90 million tax environmental remediation efforts including superfund sites also included companys provision expected loss exiting real estate development activities 37 million 24 million tax estimated environmental cleanup liabilities retained connection sale certain properties actual expenditures charged provisions previously established reserves amounted 162 million fs2 1995 yearend 1995 companys environmental remediation reserves 1234 billion including 60 million related superfund sites provisions superfund law environmental protection agency epa designated chevron potentially responsible party prp otherwise involved remediation 251 hazardous waste sites yearend 1995 companys cumulative share costs settlements approximately 174 sites payments provisions made 1995 prior years 131 million including provision 17 million made 1995 single site expected result material liability company time remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposure superfund law provides joint several liability future actions epa regulatory agencies require chevron assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity likely company continue incur additional charges beyond reserved environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amounts future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemicals concerns although environmental compliance costs substantial company reason believe vary significantly similar costs incurred companies engaged similar businesses similar areas company believes costs ultimately reflected petroleum chemicals industries prices products services past several years petroleum industry incurred major capital expenditures meet cleanair regulations 1990 amendments clean air act united states companies operating california chevron significant presence california air resources board imposed even stricter requirements past five years chevron spent approximately 18 billion capital projects comply air quality related measures bulk required spending completed 1996 total estimated environmental capital expenditures estimated 244 million compared 663 million spent 1995 reflecting completion major air quality projects capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites addition reserves environmental remediation discussed company maintains reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives costs environmentally related provisions recognized unitofproduction basis properties produced amount reserves yearend 1995 17 billion included accumulated depreciation depletion amortization companys consolidated balance sheet companys ongoing operating assets refineries provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made contingencies yearend 1995 company 250 million suspended exploratory wells included properties plant equipment wells suspended pending final determination commercial potential related oil gas fields well costs capitalized expensed depending results future drilling activity development decisions company subject various lawsuits claims contingent liabilities discussed notes accompanying consolidated financial statements company believes resolution matters materially affect financial position liquidity although losses could material respect earnings given period company utilizes various derivative instruments manage exposure price risk stemming integrated petroleum activities instruments may settled delivery underlying commodity whereas others settled cash instruments commonly used global trade petroleum products relatively straightforward involve little complexity exception certain longterm natural gas swaps shortterm duration activity instruments intended hedge physical transaction hence gains losses arising instruments offset recognized concurrently gains losses underlying commodities company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps control systems designed monitor manage financial exposures accordance company policies procedures new accounting standards effective october 1 1995 company adopted new accounting standard statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed adoption standard required noncash charges amounting 659 million tax mostly fs3 related impairment writedowns us oil gas producing properties impairment properties new standard determined individual field basis whereas previously impairment evaluated using aggregated approach sfas 123 accounting stockbased compensation establishes financial reporting standards stockbased employee compensation plans effective chevrons 1996 financial statements statement encourages require companies adopt fairvaluebased method accounting plans place current accounting standards companies electing continue existing accounting must make pro forma disclosures net income fairvaluebased method accounting applied company evaluating statement made decision whether adopt new accounting continue present accounting special items net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability years following table summarizes losses gains aftertax basis special items included companys reported net income millions dollars 1995 1994 1993 asset writeoffs revaluations new accounting standard 659 304 71 environmental remediation provisions 90 304 90 restructurings reorganizations 50 45 554 prioryear tax adjustments 22 344 130 asset dispositions 7 48 122 lifo inventory gains losses 2 10 46 84 11 114 total special items 1032 22 883 asset writeoffs revaluations 1995 estimated loss 168 million recognized connection companys decision exit real estate development business included charge 24 million anticipated environmental remediation costs concurrent implementing new accounting standard asset impairment 1995 preparation installation companys new financial information system comprehensive review companys fixed assets conducted result review asset writeoffs 94 million recorded also writedown certain assets made obsolete conversion two west coast refineries produce new californiamandated reformulated gasolines amounted 38 million miscellaneous asset writeoffs 1995 amounted 4 million 1993 asset writeoffs 71 million comprised certain us refinery assets us canadian production assets miscellaneous corporate assets environmental remediation provisions pertain estimated future costs environmental cleanup programs certain companys us service stations marketing terminals refineries chemical locations oil gas properties divested operations chevron liability future cleanup costs sites commonly referred superfund sites company designated prp epa provisions environmental remediation amounted 90 million 1995 304 million 1994 90 million 1993 restructurings reorganizations charges 1995 50 million including 12 million related restructurings chevrons caltex affiliate consisted principally voluntary involuntary employee severance provisions connection reorganizations various business activities 1993 charge 554 million composed primarily writedown companys philadelphia port arthur texas refinery facilities related inventories realizable values estimating refineries realizable values company took account certain environmental cleanup obligations charges also included provisions environmental site assessments employee severance 1994 45 million adjustment made 1993 charge result environmental remediation actions agreed regulatory agencies retained company connection terms sale port arthur refinery recognize effect refinery sale companys chemicals operations philadelphia refinery sold august 1994 port arthur refinery sale completed february 1995 yearend 1995 balance remaining refineries reserve estimated environmental cleanup liabilities included companys total environmental reserves prioryear tax adjustments generally result settlement audit issues taxing authorities reevaluation company tax liabilities result new developments also adjustments required effect deferred income taxes changes statutory tax rates 1995 charges prioryear tax adjustments 22 million relating primarily change australian income tax rate tax adjustments 1994 increased earnings 344 million including net reversal 301 million tax related interest reserves resulting companys global settlement internal revenue service irs issues relating years 1979 1987 tax adjustments decreased earnings 130 million 1993 included effect one percent increase us corporate income tax rate asset dispositions 1995 increased earnings net 7 million consisted sales fertilizer plant natural gas storage facility small oil gas property united states 1994 sale companys lead zinc prospect ireland generated aftertax profit 48 million ortho lawn garden products business major asset sold 1993 generating 130 million gain lifo inventory liquidation gains losses result reduction inventories certain inventory pools valued lastin firstout lifo accounting method lifo effects increased net income 1995 2 million inventories liquidated historical costs lower current year costs lifo losses decreased net income 1994 fs4 1993 10 million 46 million respectively inventories liquidated historical costs higher costs incurred years amounts include companys equity share caltex lifo inventory effects chevrons consolidated petroleum inventories 93 million barrels yearend 1995 99 million barrels yearend 1994 1993 special items 1995 benefited earnings net 84 million gain 86 million related sale land caltex affiliate japan refund 27 million federal lease costs offset partially litigation costs charges 1994 litigation regulatory settlements 31 million offset partially casualty insurance recovery 20 million 1993 net additions 70 million reserves various litigation regulatory issues onetime cash bonus award employees 60 million offset partially favorable inventory adjustment 16 million results operations operating results 1995 strong areas except us downstream operations poor results severely affected total earnings chemicals international upstream businesses turned record earnings us upstream operations performed well despite low natural gas prices international oil gas production reserves increased sixth consecutive year 1995 international oil gas production 4 percent company replaced 178 percent international production proved reserve additions resulting worldwide replacement rate 138 percent us downstream results 1995 affected scheduled major maintenance turnarounds companys core refineries particularly extended turnaround richmond california refinery tie new units required produce new californiamandated reformulated fuels along unplanned refinery problems low industry refining margins resulted severely depressed earnings operations results 1994 compared 1993 depressed lower average crude oil natural gas prices lower sales margins refined products crude oil prices especially low first quarter 1994 us refined products margins weak second quarter addition industry conditions company experienced unscheduled refinery downtime refinery operating problems us operations reduced earnings particularly first half 1994 chemicals operations however strong benefiting improved industry fundamentals restructuring costreduction programs undertaken recent years sales operating revenues 363 billion compared 351 billion 1994 362 billion 1993 revenues improved 1994 primarily higher prices crude oil refined products higher chemicals prices sales volumes partially offset lower refined products sales volumes lower natural gas prices decline 1994 revenues 1993 due lower prices crude oil natural gas refined products together lower refined products sales volumes higher crude oil refined products prices together increased volumes thirdparty purchased products accounted increases purchased crude oil products costs 1995 income years included net gains resulting disposition noncore assets caused income fluctuate year operating selling administrative expenses adjusted special items declined 272 million 1995 annual operating costs 1995 13 billion less 1991 base measurement year set company launched costreduction program early 1992 although portion cost reduction result operations disposed years much decrease due significant reduction companys ongoing cost structure operating expenses 1995 negatively affected scheduled refinery shutdowns maintenance unanticipated costs associated unscheduled refinery shutdowns refinery operating problems also affected operating costs 1995 1994 reported selling general administrative expenses 1994 unusually low due reversal 319 million accrued interest reserves federal income taxes payable resulting companys settlement irs issues nine open tax years millions dollars 1995 1994 1993 operating expenses 5974 6383 7104 selling general administrative expenses 1384 963 1530 total operational costs 7358 7346 8634 eliminate special charges tax 514 230 1368 adjusted ongoing operational costs 6844 7116 7266 depreciation depletion amortization increased 1995 1994 1993 impairment certain fixed assets together adjustments fixed asset carrying values taxes income 859 million 1995 1110 billion 1994 1161 billion 1993 equating effective income tax rates 48 percent 396 percent 479 percent three years respectively 1995 tax rate reflected shift taxable earnings lower taxrate countries higher taxrate countries increase tax rate offset partially higher tax credits increase equity earnings recorded aftertax basis lower 1994 tax rate attributable effect favorable prior year tax adjustments resulting global settlement irs issues years 1979 1987 included reversal excess interest reserves little associated tax effect taxes 1993 included unfavorable prioryear tax adjustments including one percent increase statutory us corporate income tax rate currency transactions decreased net income 15 million 64 million 1995 1994 respectively compared increase 46 million 1993 amounts include companys share affiliates currency transactions loss currency transactions 1995 resulted fluctu fs5 ations value canadian nigerian currencies relative us dollar 1994 due primarily fluctuations value australian philippine currencies 1993 gains resulted fluctuations currency nigeria results major operating areas millions dollars 1995 1994 1993 exploration production united states 72 518 566 international 690 539 580 total exploration production 762 1057 1146 refining marketing transportation united states 104 40 170 international 345 239 252 total refining marketing transportation 241 279 82 total petroleum 1003 1336 1228 chemicals 484 206 143 coal minerals 18 111 44 corporate 539 40 150 net income 930 1693 1265 special items major operating areas millions dollars 1995 1994 1993 exploration production united states 480 66 136 international 121 20 61 total exploration production 601 46 197 refining marketing transportation united states 179 285 725 international 62 10 1 total refining marketing transportation 117 295 724 total petroleum 718 341 921 chemicals 40 9 112 coal minerals 65 48 corporate 209 324 74 total special items included net income 1032 22 883 us exploration production earnings 1995 excluding special items 5 percent 1994 levels 21 percent 1993 operationally higher crude oil prices 1995 fully offset effects lower production volumes lower natural gas prices natural gas accounts half companys combined us oil gas production lower average crude oil natural gas prices lower crude oil production levels 1994 contributed earnings decline 1993 us exploration production millions dollars 1995 1994 1993 earnings excluding special items 552 584 702 asset writeoffs revaluations new accounting standard 490 7 13 environmental remediation provisions 8 51 13 restructurings reorganizations 2 prioryear tax adjustments 40 asset dispositions 2 54 lifo inventory lossesgains 4 1 27 11 15 total special items 480 66 136 reported earnings 72 518 566 net liquids production 1995 averaged 350000 barrels per day 5 percent 369000 barrels per day 1994 11 percent 394000 barrels per day 1993 net natural gas production 1995 averaged 19 billion cubic feet per day compared 21 billion cubic feet per day 1994 1993 production declines resulted producing property sales normal field declines partially offset new production company several projects way including major longterm development projects gulf mexico expected stabilize us oil gas production volumes companys average crude oil realizations 1534 per barrel 1995 increase 148 1386 per barrel 1994 76 cent increase 1458 per barrel averaged 1993 crude oil prices began falling second half 1993 reached low point early 1994 recovered yearend 1994 remained relatively steady 1995 average natural gas prices 151 per thousand cubic feet 1995 26 cents 1994 average 177 per thousand cubic feet natural gas prices also fell throughout 1994 22 cents 199 1993 natural gas prices increased december 1995 remained strong 1996 reflecting increased demand caused abnormally cold weather eastern united states ongoing operating expenses exploration expenses 1995 declined 1994 1993 levels ongoing depreciation expense declined year result lower production volumes international exploration production earnings 1995 reflected higher crude oil sales volumes prices also contributing improved results benefit significantly lower effective tax rates west africa primarily resulting credits associated crude oil reserve additions 1994 85 million swing foreign exchange rates principal cause earnings decline 1993 levels fs6 international exploration production millions dollars 1995 1994 1993 earnings excluding special items 811 519 641 asset writeoffs revaluations new accounting standard 81 19 restructurings reorganizations 10 2 prioryear tax adjustments 22 20 63 asset dispositions 29 lifo inventory losses 1 7 5 total special items 121 20 61 reported earnings 690 539 580 operationally companys average international liquids prices including equity affiliates increased 1610 per barrel 1486 1994 1993 price 1609 per barrel average natural gas prices 173 per thousand cubic feet 1995 compared 184 208 1994 1993 respectively 1995 net liquids production including production equity affiliates increased 4 percent 1994 651000 barrels per day 17 percent 1993 production levels new production west africa china australia accounted increase net natural gas production volumes also increased 1995 3 percent 1994 565 million cubic feet per day 20 percent 1993 levels production crude oil natural gas increasing steadily since late 1980s reflecting companys successful strategy growing international operations 1995 1994 foreign exchange losses 16 million 28 million respectively whereas 1993 foreign exchange gains amounted 57 million selected operating data 1995 1994 1993 us exploration production net crude oil natural gas liquids production mbpd 350 369 394 net natural gas production mmcfpd 1868 2085 2056 natural gas liquids sales mbpd 213 215 211 revenues net production crude oil bbl 1534 1386 1458 natural gas mcf 151 177 199 international exploration production1 net crude oil natural gas liquids production mbpd 651 624 556 net natural gas production mmcfpd 565 546 469 natural gas liquids sales mbpd 47 34 37 revenues liftings liquids bbl 1610 1486 1609 natural gas mcf 173 184 208 us refining marketing gasoline sales mbpd 552 615 652 refined products sales mbpd 565 699 771 refinery input mbpd 925 1213 1307 average refined products sales price bbl 2619 2437 2535 international refining marketing1 refined products sales mbpd 969 934 923 refinery input mbpd 598 623 598 chemicals sales operating revenues2 united states 3332 2801 2459 international 621 561 518 worldwide 3953 3362 2977 mbpd thousand barrels per day mmcfpd million cubic feet per day bbl barrel mcf thousand cubic feet 1 includes equity affiliates 2 millions dollars includes sales chevron companies 1994 1993 amounts restated conform 1995 presentation us refining marketing earnings excluding special items declined 77 percent 1994 levels 86 percent strong results 1993 extensive scheduled unscheduled refinery maintenance coupled weak industry refining margins resulted significantly reduced operating earnings 1995 addition richmond california refinery extended period 1995 fourth quarter upgrades required produce cleanerburning californiamandated gasolines average refined products prices higher 1995 compared 1994 1993 partially reflecting increase crude oil feedstock costs industry refining margins weak refined products availability remained ample margins weakened high maintenance expenses 1995 fs7 caused extensive refinery downtime also required expensive thirdparty product purchases supply companys marketing system results 1994 lower 1993 industry sales margins lower unscheduled refinery downtime early 1994 negatively affected operating expenses purchased products costs us refining marketing millions dollars 1995 1994 1993 earnings excluding special items 75 325 555 asset writeoffs revaluations new accounting standard 112 25 environmental remediation provisions 62 249 77 restructurings reorganizations 7 39 543 prioryear tax adjustments 38 asset dispositions 1 lifo inventory gains losses 2 3 44 3 total special items 179 285 725 reported loss earnings 104 40 170 refined products sales volumes 1995 declined 15 percent 22 percent 1994 1993 levels largely due sales companys philadelphia refinery august 1994 port arthur texas refinery february 1995 connection major restructuring us refining marketing operations volume declines year occurred primarily unbranded bulk sales volumes sold companys marketing system flat three years international refining marketing earnings include international marine operations equity earnings companys caltex petroleum corporation affiliate excluding special items 1995 earnings increased 14 percent 1994 levels 13 percent 1993 international refining marketing millions dollars 1995 1994 1993 earnings excluding special items 283 249 251 asset writeoffs revaluations new accounting standard 1 restructurings reorganizations 17 1 prioryear tax adjustments 4 asset dispositions 13 lifo inventory losses 10 3 80 3 total special items 62 10 1 reported earnings 345 239 252 improved results 1995 primarily reflect improved shipping operations partially offset lower results united kingdom refining marketing operations low industry sales margins extensive planned refinery turnaround second quarter negatively affected earnings shipping results improved higher ocean freight rates lower operating expenses also modest improvement earnings reported companys caltex affiliate despite poor refining margins throughout major operating areas asia pacific region south africa compared 1993 earnings 1994 also reflected lower results companys united kingdom operations experienced explosion fire cracking facility manufactures gasoline three years reflected weak industry conditions held product prices resulting shrinking sales margins companys major areas operations international sales volumes 1995 increased 4 percent 1994 levels due higher caltex sales volumes increased sales chevrons international trading operations sales 1994 1993 flat 5 percent increase marketing sales 1994 offset mostly decline companys trading sales volumes caltex volumes excluding transactions chevron increased 6 percent 1994 4 percent 1993 1994 continuing growth past several years equity earnings caltex 294 million 210 million 227 million 1995 1994 1993 respectively 1995 chevrons share caltex earnings included 86 million benefit gain related land sale caltex affiliate japan gain offset partially special items netting 18 million related caltex restructurings asset writeoffs 1995 1994 chevrons share caltex earnings benefited 13 million 15 million respectively upward adjustments carrying value petroleum inventories reflect market values 1993 writedown 52 million also 1995 results included 13 million favorable foreign tax benefits caltex foreign currency transactions resulted gains 26 million 1995 losses 27 million 1994 gains 16 million 1993 total international refining marketing foreign currency transactions amounted gains 19 million 1995 losses 19 million 1994 gains 2 million 1993 chemicals reported record earnings excluding special items dramatically 1994 1993 levels reflecting higher sales volumes product prices however second half 1995 industry conditions began soften falling prices companys major products coupled increased feedstock costs caused earnings decline first half year nevertheless operating results strong companys divisions additives aromatics olefins foreign currency transaction losses 3 million 1995 10 million 1994 1993 fs8 chemicals millions dollars 1995 1994 1993 earnings excluding special items 524 215 31 asset writeoffs revaluations new accounting standard 13 14 environmental remediation provisions 20 4 restructurings reorganizations 3 6 5 prioryear tax adjustments 5 asset dispositions 9 130 lifo inventory gains 1 9 total special items 40 9 112 reported earnings 484 206 143 coal minerals earnings excluding special items 25 percent 1994 levels 7 percent 1993 results mild weather first half 1995 coupled customers electing purchase cheaper alternate fuels reduced demand resulting lower sales volumes lower prices operating results improved late year industry conditions improved sales 17 million tons 15 percent 20 million tons produced prior two years earnings 1994 higher 1993 coal sales margins slightly higher earnings benefited absence 1993 losses noncoal minerals activities coal minerals millions dollars 1995 1994 1993 earnings excluding special items 47 63 44 asset writeoffs revaluations new accounting standard 63 restructurings reorganizations 2 prioryear tax adjustments 2 asset dispositions 48 5 3 total special items 65 48 reported loss earnings 18 111 44 corporate activities include interest expense interest income cash marketable securities real estate insurance operations corporate center costs corporate millions dollars 1995 1994 1993 earnings excluding special items 330 284 76 asset writeoffs revaluations new accounting standard 12 170 13 restructurings reorganizations 11 1 prioryear tax adjustments 324 22 16 82 total special items 209 324 74 reported loss earnings 539 40 150 corporate net operating charges excluding special items increased 1995 higher interest rates lower earnings real estate operations offset lower corporate overhead expenses interest expense 1994 higher 1993 due combined effect higher debt levels higher interest rates corporate charges 1995 1994 higher 1993 company changed method distributing certain corporate expenses business segments 1994 result corporate charges 1995 1994 included 226 million 190 million respectively previous method would allocated business segments change net income effect liquidity capital resources cash equivalents marketable securities increased 88 million 14 billion yearend 1995 cash provided operating activities 1995 41 billion compared 29 billion 1994 42 billion 1993 1995 increase reflects higher operational earnings adjusted noncash charges lower working capital requirements including absence 1994 payment 675 million internal revenue service settlement several years open tax issues cash operations proceeds asset sales increase overall debt levels used fund companys capital expenditures dividend payments stockholders yearend 1995 company classified 18 billion shortterm obligations longterm debt settlement obligations consisting commercial paper expected require use working capital 1996 company intent ability evidenced committed credit arrangements refinance longterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate december 31 1995 chevron 44 billion committed credit facilities various major banks facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 1995 addition chevron one subsidiaries existing shelf registrations file securities exchange commission together would permit registered offerings 13 billion debt securities companys debt capital lease obligations totaled 8327 billion december 31 1995 185 million 8142 billion yearend 1994 increase primarily issuance 282 million capital lease obligations associated sale leaseback four vessels 160 million 761 percent notes due 2003 51 million 692 percent notes due 2005 increases offset partially 227 million repayments net shortterm borrowings largely commercial paper miscellaneous debt repayments 98 million company also retired 50 million debt related employee stock ownership plan january 1995 companys future debt level dependent primarily capital spending program business outlook company currently expect debt level increase significantly 1996 believes substantial borrowing capacity meet unanticipated cash requirements fs9 financial ratios current ratio current assets current liabilities year end two items affect current ratio negatively companys opinion affect liquidity included current assets years inventories valued lifo basis yearend 1995 lower current costs 917 million also companys practice continually refinancing commercial paper 30 billion classified shortterm year end 1995 results large portion shortterm debt outstanding indefinitely interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrons interest coverage ratio decreased 1995 due lower beforetax income higher interest expense companys debt ratio total debt total debt plus equity increased slightly 1995 total debt increased stockholders equity decreased year due charge earnings adoption new accounting standard financial ratios 1995 1994 1993 current ratio 08 interest coverage ratio 41 76 74 total debttotal debt plus equity 367 358 350 companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1 standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service moodys counterparty rating chevron also aa2 ratings denote high quality investmentgrade securities capital exploratory expenditures worldwide capital exploratory expenditures 1995 totaled 48 billion including companys equity share affiliates expenditures exploration production accounted 57 percent total outlays 1995 1994 compared 53 percent 1993 international exploration production spending 68 percent worldwide exploration production expenditures 1995 slightly 71 percent 1994 percentage 1993 reflecting companys continued focus international exploration production activities company projects 1996 capital exploratory expenditures approximately 53 billion including chevrons share spending affiliates 10 percent 1995 levels 1996 program provides 30 billion exploration production investments 65 percent international projects several longterm development projects gulf mexico designed stabilize us oil gas production account projected 19 percent increase us exploration production expenditures company participating several significant oil gas development projects include continuing development hibernia oil field coast newfoundland steam waterflood projects indonesia expansion north west shelf liquefied natural gas project australia development britannia gas field expansion alba oil field north sea development nkossa kitina projects delineation work moho discovery congo continued development escravos gas project nigeria development areas b c angola continuing enhanced oil recovery projects california continued development norphlet trend natural gas green canyon deepwater oil projects gulf mexico tco joint venture plans fund increase production capacity 95000 130000 barrels per day expected increase crude oil sales occurs refining marketing transportation expenditures estimated 15 billion 890 million planned international projects completion 1995 companys us refinery upgrade projects produce californiamandated fuels result lower total spending us downstream areas 36 percent 570 million 1996 spending increase 40 percent 282 million domestic marketing projects international capital program focused highgrowth asiapacific rim countries companys caltex affiliate several major refinery projects way increase capacity meet rising demand well major project upgrade retail marketing system chemicals spending also increase substantially expansion projects ethylene facilities port arthur texas paraxylene plant pascagoula mississippi polystyrene plant marietta ohio construction fuel lube oil additives plant singapore joint venture benzene cyclohexane complex saudi arabia capital exploratory expenditures fs10 quarterly results stock market data unaudited report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements assuring integrity objectivity statements prepared accordance generally accepted accounting principles fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited price waterhouse llp independent accountants selected audit committee approved stockholders management made available price waterhouse llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management k derr r klitten g henderson kenneth derr martin r klitten donald g henderson chairman board vice president vice president chief executive officer chief financial officer comptroller february 23 1996 fs11 consolidated statement income year ended december 31 millions dollars except pershare amounts 1995 1994 1993 revenues sales operating revenues 36310 35130 36191 equity net income affiliated companies 553 440 income 219 284 451 total revenues 37082 35854 37082 costs deductions purchased crude oil products 18033 16990 18007 operating expenses 5974 6383 7104 exploration expenses 372 379 360 selling general administrative expenses 1384 963 1530 depreciation depletion amortization 3381 2431 2452 taxes income 5748 5559 4886 interest debt expense 401 346 317 total costs deductions 35293 33051 34656 income tax expense 1789 2803 2426 income tax expense 859 1110 1161 net income 930 1693 1265 net income per share common stock 143 260 194 weighted average number shares outstanding 652083804 651672238 650957752 includes consumer excise taxes 4988 4790 4068 see accompanying notes consolidated financial statements report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1995 1994 results operations cash flows three years period ended december 31 1995 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed discussed note 3 consolidated financial statements effective october 1 1995 company changed method accounting impairment longlived assets comply provisions statement financial accounting standard 121 price waterhouse llp san francisco california february 23 1996 fs12 consolidated balance sheet december 31 millions dollars 1995 1994 assets cash equivalents 621 413 marketable securities 773 893 accounts notes receivable less allowance 1995 69 1994 62 4014 3923 inventories crude oil petroleum products 822 1036 chemicals 487 391 materials supplies 289 283 1598 1710 prepaid expenses current assets 861 652 total current assets 7867 7591 longterm receivables 149 138 investments advances 4087 3991 properties plant equipment cost 48031 46810 less accumulated depreciation depletion amortization 26335 24637 21696 22173 deferred charges assets 531 514 total assets 34330 34407 liabilities stockholders equity shortterm debt 3806 4014 accounts payable 3294 2990 accrued liabilities 1257 1274 federal taxes income 558 624 taxes payable 530 490 total current liabilities 9445 9392 longterm debt 4133 3955 capital lease obligations 388 173 deferred credits noncurrent obligations 1992 2043 noncurrent deferred income taxes 2433 2674 reserves employee benefit plans 1584 1574 total liabilities 19975 19811 preferred stock authorized 100000000 shares 100 par value none issued common stock authorized 1000000000 shares 150 par value 712487068 shares issued 1069 capital excess par value 1863 1858 deferred compensation employee stock ownership plan esop 850 900 currency translation adjustment 174 175 retained earnings 14146 14457 treasury stock cost 1995 60160057 shares 1994 60736435 shares 2047 2063 total stockholders equity 14355 14596 total liabilities stockholders equity 34330 34407 see accompanying notes consolidated financial statements fs13 consolidated statement cash flows year ended december 31 millions dollars 1995 1994 1993 operating activities net income 930 1693 1265 adjustments depreciation depletion amortization 3381 2431 2452 dry hole expense related prior years expenditures 19 53 29 distributions less equity affiliates income 132 55 173 net beforetax losses gains asset retirements sales 164 83 373 net foreign exchange losses gains 47 40 27 deferred income tax provision 258 110 160 net decrease increase operating working capital1 40 1773 463 116 480 1 net cash provided operating activities2 4075 2896 4221 investing activities capital expenditures 3529 3405 3323 proceeds asset sales 581 731 908 net sales purchases marketable securities3 144 545 30 net cash used investing activities 2804 3219 2385 financing activities net repayments borrowings shortterm obligations 227 466 293 proceeds issuance longterm debt 536 436 199 repayments longterm debt financing obligations 103 588 854 cash dividends paid 1255 1206 1139 purchases treasury shares 4 5 4 net cash used financing activities 1053 897 1505 effect exchange rate changes cash equivalents 10 11 21 net change cash equivalents 208 1231 352 cash equivalents beginning year 413 1644 1292 cash equivalents yearend 621 413 1644 1the net decrease increase operating working capital composed following increase decrease accounts notes receivable 62 44 187 increase decrease inventories 162 57 288 increase decrease prepaid expenses current assets 148 4 52 increase decrease accounts payable accrued liabilities 428 1510 214 decrease income taxes payable 16 166 174 net decrease increase operating working capital 40 1773 463 2net cash provided operating activities includes following cash payments interest income taxes interest paid debt net capitalized interest 318 310 309 income taxes paid 1176 1147 1505 3net sales purchases marketable securities consists following gross amounts marketable securities purchased 2759 1943 1855 marketable securities sold 2903 1398 1885 net sales purchases marketable securities 144 545 30 see accompanying notes consolidated financial statements fs14 consolidated statement stockholders equity fs15 notes consolidated financial statements millions dollars note 1 summary significant accounting policies chevron corporation international company subsidiaries affiliates engages fully integrated petroleum operations chemical operations coal mining united states approximately 95 countries petroleum operations consist exploring developing producing crude oil natural gas transporting crude oil natural gas products pipelines marine vessels motor equipment refining crude oil finished petroleum products marketing crude oil natural gas refined petroleum products chemicals operations include manufacture marketing wide range chemicals industrial uses preparing consolidated financial statements company follows accounting policies accordance generally accepted accounting principles united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur company believes effect changes near term would material effect financial statements nature companys operations many countries operates subject changing economic regulatory political conditions also company imports crude oil us refining operations company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 50 percent company participates policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method accounting used oil gas exploration production activities derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income gains losses derivatives contracts qualify hedges recognized currently income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities inventories crude oil petroleum products chemicals stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment costs development wells related plant equipment including carbon dioxide certain injected materials used enhanced recovery projects mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed beginning 1995 longlived assets including proved oil gas properties assessed possible impairment accordance provisions sfas 121 standard occurrence certain events may trigger review affected assets possible impairment proved oil gas properties company would typically perform review individual field basis impairment deemed exist sum undiscounted beforetax expected future cash flows asset less assets carrying value impairment indicated amount impairment measured difference assets fair market value net book value market value available approximated companys best estimate sum discounted future beforetax cash flows impairment amounts recorded incremental depreciation expense period specific event occurred prior adoption sfas 121 proved oil gas properties regularly assessed possible impairment aggregate worldwide portfolio basis applying informal ceiling test securities exchange commission method possibility impairment existed aggregate net book carrying value properties net applicable deferred income taxes exceeded aggregate undiscounted future cash flows tax properties calculated accordance accounting rules supplemental information oil gas producing activities addition high cost longleadtime oil gas projects individually assessed prior production startup comparing recorded investment project fair market economic value appropriate economic values generally based managements expectations discounted future aftertax cash flows project time assessment depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction fs16 note 1 summary significant accounting policies continued method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitof production method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized environmental expenditures environmental expenditures relate current ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys domestic marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs current dollars using currently available technology applying current regulations well companys internal environmental policies future amounts discounted probable recoveries reimbursements recorded asset currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions included income currently cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely note 2 special items financial information net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net decrease increase net income related tax effects year ended december 31 1995 1994 1993 asset writeoffs revaluations new accounting standard 659 real estate development assets 168 adjustment fixed assets records 94 refining marketing assets 38 24 oil gas properties 31 4 16 963 71 environmental remediation provisions 90 304 90 restructurings reorganizations workforce reductions 38 11 caltex 12 us refining marketing 39 543 chemicals 6 50 45 554 prioryear tax adjustments 22 344 130 asset dispositions net oil gas properties 6 25 lead zinc property ireland 48 ortho lawn garden products 130 1 17 7 48 122 lifo inventory gains losses 2 10 46 net caltex gain related land sale 86 federal lease cost refund 27 litigation regulatory issues 23 31 70 onetime employee bonus 60 miscellaneous net 6 20 16 84 11 114 total special items tax 1032 22 883 fs17 note 2 special items financial information continued 1995 company caltex affiliate committed restructurings reorganizations several businesses activities aftertax provisions totaling 50 recorded substantially related employee severance programs number employees identified terms benefits communicated expected programs completed 1996 1993 1994 aftertax provisions totaling 588 recorded financial effects companys decision sell two refineries one refineries sold 1994 sale completed early 1995 completion sales remaining reserve balance 224 estimated environmental cleanup obligations retained company excess previously established reserves refineries classified companys environmental reserves financial information follows year ended december 31 1995 1994 1993 total financing interest debt costs 543 419 371 less capitalized interest 142 73 54 interest debt expense 401 346 317 research development expenses 185 179 206 currency transaction losses gains 15 64 46 includes 25 24 18 1995 1994 1993 respectively companys share affiliates currency transaction effects excess current cost based average acquisition costs year carrying value inventories lifo method used 917 684 671 december 31 1995 1994 1993 respectively note 3 adoption statement financial accounting standard sfas 121 accounting impairment longlived assets longlived assets disposed effective october 1 1995 company affiliates adopted sfas 121 issued financial accounting standards board adoption standard required noncash charges 1995 net income amounting 659 101 per share related income tax benefits 358 mostly related impairment writedowns us oil gas producing properties note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following noncash transactions capital lease arrangements 282 65 1995 1994 respectively recorded additions properties plant equipment deferred charges assets capital lease obligations companys employee stock ownership plan esop repaid 50 40 matured debt guaranteed chevron corporation 1995 1994 respectively company reflected payment reductions shortterm debt deferred compensation esop 1993 company acquired 50 percent interest tengizchevroil joint venture tco republic kazakstan series cash noncash transactions companys interest tco accounted using equity method accounting recorded investments advances consolidated balance sheet cash expended connection formation tco subsequent advances tco included consolidated statement cash flows capital expenditures deferred payment portion tco investment totaled 461 466 yearend 1995 1994 respectively recorded accrued liabilities deferred credits noncurrent obligations consolidated balance sheet payments related deferred portion tco investment classified repayments longterm debt financing obligations consolidated statement cash flows company refinanced aggregate amount 334 taxexempt longterm debt capital lease obligations 1993 refinancings reflected consolidated statement cash flows noncash transactions occurred years presented include reissuance treasury shares management compensation plans acquisitions properties plant equipment capital lease transactions changes assets liabilities stockholders equity resulting accounting companys esop minimum pension liability market value adjustments investments amounts transactions material aggregate relation companys financial position major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented year ended december 31 1995 1994 1993 additions properties plant equipment 3611 3112 3214 additions investments 44 284 179 payments liabilities assets net 126 9 70 capital expenditures 3529 3405 3323 expensed exploration expenditures 354 326 330 payments longterm debt financing obligations 5 242 86 capital exploratory expenditures excluding equity companies 3888 3973 3739 excludes noncash capital lease additions 282 65 1995 1994 respectively note 5 stockholders equity retained earnings december 31 1995 1994 include 2363 2265 respectively companys share undistributed earnings equity affiliates 1988 company declared dividend distribution one right outstanding share common stock fs18 note 5 stockholders equity continued rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company right entitles holder purchase stock value equal two times exercise price right person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase opportunity rights expire november 1998 may redeemed company 5 cents per share prior date rights voting dividend rights become exercisable dilutive effect earnings company twenty million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1995 made rights exercisable note 6 financial derivative instruments offbalancesheet risk company utilizes variety derivative instruments financial commodity based hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity instruments consist mainly crude oil natural gas futures contracts traded new york mercantile exchange international petroleum exchange natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated crude oil natural gas purchases sales generally forecasted occur within 60day period natural gas swaps primarily used hedge firmly committed sales terms swap contracts held average maturity 20 months gains losses derivative instruments offset recognized concurrently gains losses underlying commodities addition company 1995 entered managed program utilizing natural gas contracts take advantage perceived opportunities favorable price movements commodity results program reflected currently income material 1995 company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures primarily anticipated purchase transactions forecasted occur within 90 days company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts made either semiannually annually recorded monthly interest debt expense december 31 1995 seven contracts remaining terms one ten years concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed various foreign governments wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentration credit risk similar standards diversity creditworthiness applied companys counterparties derivative instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit principal security obtained support lines credit negotiated contracts financial strength customer considered sufficient fair value fair values derived either quoted market prices available absence present value expected cash flows fair values reflect cash would received paid instruments settled yearend december 31 1995 1994 fair values financial derivative instruments follows longterm debt 2333 2155 estimated fair values 2492 2127 notional principal amounts interest rate swaps totaled 1223 850 approximate fair values totaling 26 33 notional amounts derivative instruments represent assets liabilities company rather basis settlements contract terms company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes primary instruments held cash equivalents marketable securities fair values 1219 1178 balances 446 285 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities one year four years derivatives contract notional values 1995 1994 follows crude oil natural gas futures contract values 57 68 forward exchange contracts contract values 102 60 fair values derivative instruments approximated contract values gas swap contracts based notional gas volumes approximately 180 149 billion cubic feet negative fair values totaling 33 38 deferred gains losses accrued consolidated balance sheet material note 7 summarized financial data chevron usa inc december 31 1995 chevron usa inc chevron corporations principal operating company consisting primarily companys us integrated petroleum operations excluding domestic pipeline operations fs19 note 7 summarized financial data chevron usa inc continued operations conducted three divisions chevron usa production company chevron products company formerly chevron usa products company warren petroleum company summarized financial information chevron usa inc consolidated subsidiaries presented year ended december 31 1995 1994 1993 sales operating revenues 24392 25833 28092 total costs deductions 25177 25367 27588 net loss income 384 501 325 1995 net income includes 490 companys adoption sfas 121 december 31 1995 1994 current assets 3426 3341 assets 13666 14136 current liabilities 5800 6347 liabilities 5357 5599 net equity 5935 5531 company announced january 1996 entered exclusive negotiations ngc corporation merge certain gas gathering processing marketing operations chevron usa production companys natural gas business unit warren petroleum company ngc corporation merger expected completed second quarter 1996 following company approximate 28 percent ownership interest resulting company note 8 litigation company defendant numerous lawsuits including action brought company oxy usa oklahoma state court plaintiffs may seek recover large sometimes unspecified amounts matters may remain unresolved several years practical estimate range possible loss companys litigation matters losses could material respect earnings given period however management opinion resolution lawsuits result significant liability company relation consolidated financial position liquidity oxy usa brought lawsuit capacity successor interest cities services company involves claims damages resulting allegedly improper termination tender offer purchase cities stock 1982 made gulf oil corporation acquired chevron 1984 trial respect claims expected begin 1996 note 9 summarized financial data chevron transport corporation chevron transport corporation ctc liberian corporation indirect wholly owned subsidiary chevron corporation ctc principal operator chevrons international tanker fleet engaged marine transportation oil refined petroleum products ctcs shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiarys obligations connection certain debt securities ctc deemed issuer accordance securities exchange commissions disclosure requirements summarized financial information ctc consolidated subsidiaries presented information derived financial statements prepared standalone basis conformity generally accepted accounting principles separate financial statements disclosures respect ctc omitted separate financial statements disclosures material investors debt securities deemed issued ctc restrictions ctcs ability pay dividends make loans advances december 31 1995 year ended december 31 1995 1994 1993 sales operating revenues 462 440 543 total costs deductions 477 504 553 loss cumulative effect changes accounting principles 23 58 3 cumulative effect changes accounting principles 15 net loss 23 58 18 1993 includes cumulative effect ctcs adoption statement financial accounting standards 109 accounting income taxes purposes chevron corporation consolidated financial statements adopted 1992 december 31 1995 1994 current assets 37 75 assets 1561 851 current liabilities 459 404 liabilities 431 208 net equity 708 314 note 10 geographic segment data geographic segment distributions companys identifiable assets operating income sales operating revenues summarized following tables december 31 1995 1994 1993 identifiable assets united states petroleum 14521 15540 16443 chemicals 2115 1992 2045 coal minerals 503 592 744 total united states 17139 18124 19232 international petroleum 13392 12493 12202 chemicals 409 411 412 coal minerals 28 45 13 total international 13829 12949 12627 total identifiable assets 30968 31073 31859 corporate 3362 3334 2877 total assets 34330 34407 34736 fs20 note 10 geographic segment data continued year ended december 31 1995 1994 1993 operating income united states petroleum 64 831 692 chemicals 689 241 162 coal minerals 42 60 59 total united states 583 1132 913 international petroleum 2074 1672 1772 chemicals 96 81 63 coal minerals 3 79 3 total international 2173 1832 total operating income 2756 2964 2745 corporate 967 161 319 income tax expense 859 1110 1161 net income 930 1693 1265 operating income 1995 included asset impairment writedowns 1017 connection adoption sfas 121 follows us petroleum 754 us chemicals 20 us coal minerals 97 international petroleum 127 corporate 19 beginning january 1 1994 company longer distributes certain corporate expenses business segments prior 1994 expenses allocated basis segments identifiable assets including allocation corporate starting 1994 segments billed direct corporate services unbilled corporate expenses included corporate company believes better reflects current organizational management structure business units corporate departments result change corporate 1995 1994 included 277 232 respectively beforetax expenses previous method would reduced segment operating income change net income company also connection change company longer allocates certain corporate identifiable assets business segments december 31 1995 1994 corporate included 1349 1259 identifiable assets previous years would included identifiable assets business segments changes resulted increase 1995 1994 us petroleum operating income 121 101 international petroleum 132 111 respectively identifiable assets december 31 1995 1994 us petroleum reduced 632 630 international petroleum 583 506 respectively effect changes 1995 1994 operating income yearend 1995 1994 identifiable assets companys segments geographic areas material identifiable assets business segments include assets associated operations indicated geographic areas including investments affiliates year ended december 31 1995 1994 1993 sales operating revenues united states petroleumrefined products 10677 11690 13169 crude oil 3850 3466 4086 natural gas 1604 1755 1776 natural gas liquids 1130 1072 1098 petroleum revenues 717 637 682 excise taxes 2999 2977 2554 intersegment 676 977 924 total petroleum 21653 22574 24289 chemicalsproducts 3157 2528 2211 intersegment 175 273 248 total chemicals 3332 2801 2459 coal minerals 350 415 447 total united states 25335 25790 27195 international petroleumrefined products 2794 2638 2920 crude oil 5526 4783 4415 natural gas 415 383 380 natural gas liquids 155 108 137 petroleum revenues 429 307 285 excise taxes 1977 1797 1499 intersegment 2 1 total petroleum 11296 10014 9637 chemicalsproducts 600 537 497 excise taxes 12 16 15 intersegment 9 8 6 total chemicals 621 561 518 coal minerals 7 1 total international 11924 10576 10155 intersegment sales elimination 860 1256 1179 corporate 89 20 total sales operating revenues 36310 35130 36191 memo intergeographic sales united states 565 512 266 international 1077 1803 4418 sales operating revenues petroleum segments derived production sale crude oil natural gas natural gas liquids refining marketing petroleum products company also obtains revenues transportation trading crude oil refined products chemicals revenues result primarily sale petrochemicals plastic resins lube oil fuel additives coal minerals revenues relate primarily coal sales 1994 company essentially completed withdrawal noncoal minerals activities companys real estate insurance operations worldwide cash management financing activities corporate sales operating revenues table include sales unaffiliated customers sales transfer products segments sales transfer products segments geographic areas generally estimated market prices transfers geographic areas presented memo items table fs21 note 10 geographic segment data continued equity earnings affiliated companies associated segments affiliates operate sales caltex group included international petroleum segment information caltex tengizchevroil affiliates presented note 12 affiliates either material vertically integrated segments operations note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows december 31 1995 1994 petroleum exploration production 46 45 refining marketing transportation 833 618 879 663 less accumulated amortization 403 398 net capitalized leased assets 476 265 december 31 1995 future minimum lease payments operating capital leases follows december 31 operating capital year leases 1996 142 90 1997 130 86 1998 106 84 1999 96 75 2000 93 65 thereafter 131 885 total 698 1285 less amounts representing interest executory costs 582 net present values 703 less capital lease obligations included shortterm debt 315 longterm capital lease obligations 388 future sublease rental income 37 rental expenses incurred operating leases 1995 1994 1993 follows year ended december 31 1995 1994 1993 minimum rentals 403 410 452 contingent rentals 9 7 9 total 412 417 461 less sublease rental income 14 15 net rental expense 398 403 446 contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time note 12 investments advances investments advances companies accounted using equity method investments accounted cost follows december 31 1995 1994 equity method affiliates caltex group exploration production 446 496 refining marketing transportation 2032 1866 total caltex group 2478 2362 tengizchevroil 1153 affiliates 293 346 3924 3861 cost 163 130 total investments advances 4087 3991 chevron owns 50 percent pt caltex pacific indonesia exploration production company operating indonesia caltex petroleum corporation subsidiaries affiliates conducts refining marketing activities asia africa australia new zealand american overseas petroleum limited subsidiary manages certain companys exploration production operations indonesia companies subsidiaries affiliates collectively called caltex group tengizchevroil tco 50percent owned joint venture formed 1993 republic kazakstan develop tengiz korolev oil fields 40 year period investment tco december 31 1995 1994 included deferred payment portion 461 466 respectively 420 payable republic kazakstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity portion investment recorded upon formation venture company believed time continues believe payment beyond reasonable doubt given original intent continuing commitment parties realizing full potential venture 40year life equity earnings companies accounted equity method together dividends similar distributions received equity method companies years 1995 1994 1993 follows year ended december 31 equity earnings dividends 1995 1994 1993 1995 1994 1993 caltex group exploration production 156 140 134 refining marketing transportation 294 210 227 total caltex group 450 350 361 305 239 172 tengizchevroil 1 10 1 affiliates 102 100 80 116 146 95 total 553 440 421 385 267 fs22 note 12 investments advances continued companys transactions affiliated companies primarily purchase indonesian crude oil pt caltex pacific indonesia sale crude oil products caltex petroleum corporations refining marketing companies summarized following table year ended december 31 1995 1994 1993 sales caltex group 1330 1166 1739 sales affiliates 10 7 5 total sales affiliates 1340 1173 1744 purchases caltex group 934 800 842 purchases affiliates 40 52 101 total purchases affiliates 974 852 943 accounts notes receivable consolidated balance sheet include 144 135 december 31 1995 1994 respectively amounts due affiliated companies accounts payable include 37 46 december 31 1995 1994 respectively amounts due affiliated companies following tables summarize combined financial information caltex group equity method companies together chevrons share amounts shown affiliates 100 percent note 13 properties plant equipment expenses maintenance repairs 833 928 875 1995 1994 1993 respectively fs23 note 14 taxes year ended december 31 1995 1994 1993 taxes income united states excise taxes products merchandise 2999 2978 2554 property miscellaneous taxes 341 395 401 payroll taxes 127 112 122 taxes production 105 102 135 total united states 3572 3587 3212 international excise taxes products merchandise 1989 1812 1514 property miscellaneous taxes 146 127 134 payroll taxes 30 19 taxes production 11 14 7 total international 2176 1972 1674 total taxes income 5748 5559 4886 year ended december 31 1995 1994 1993 taxes income us federal current 152 175 394 deferred 289 43 241 deferred adjustment enacted changes tax lawsrates 54 state local 29 10 63 total united states 108 228 270 international current 937 815 864 deferred 14 67 48 deferred adjustment enacted changes tax lawsrates 16 21 total international 967 882 891 total taxes income 859 1110 1161 us federal income tax expense reduced 68 60 57 1995 1994 1993 respectively lowincome housing business tax credits 1995 beforetax loss income us operations 331 compared 1194 1994 687 1993 beforetax income international operations 2120 1609 1739 1995 1994 1993 respectively deferred income tax provisions included benefits costs 75 475 98 related properties plant equipment 1995 1994 1993 respectively benefits recorded 1995 358 related impairment longlived assets 91 related provision expected loss exiting real estate development business us benefits recorded 1993 related us refining marketing restructuring provision companys effective income tax rate varied us statutory federal income tax rate following year ended december 31 1995 1994 1993 statutory us federal income tax rate 350 effects income taxes international operations excess taxes us statutory rate 262 185 156 effects asset dispositions 01 06 state local taxes income net us federal income tax benefit 09 02 22 prioryear tax adjustments 03 44 30 effects enacted changes tax lawsrates deferred tax liabilities 09 13 tax credits 38 21 24 others 26 32 09 consolidated companies 568 440 532 effect recording equity income certain affiliated companies aftertax basis 88 44 53 effective tax rate 480 396 479 company records deferred taxes tax jurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1995 1994 deferred taxes classified consolidated balance sheet follows december 31 1995 1994 prepaid expenses current assets 139 112 deferred charges assets 138 148 federal taxes income 11 18 noncurrent deferred income taxes 2433 2674 total deferred income taxes net 2167 2432 reported deferred tax balances composed following deferred tax liabilities assets december 31 1995 1994 properties plant equipment 4442 4451 inventory 182 240 miscellaneous 277 254 deferred tax liabilities 4901 4945 abandonmentenvironmental reserves 1169 1066 employee benefits 567 564 amtother tax credits 816 711 accrued liabilities 240 299 miscellaneous 649 523 deferred tax assets 3441 3163 deferred tax assets valuation allowance 707 650 total deferred taxes net 2167 2432 companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled fs24 note 14 taxes continued approximately 3712 december 31 1995 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 207 would payable upon remittance earnings note 15 shortterm debt december 31 1995 1994 commercial paper1 4808 5036 current maturities longterm debt 143 134 current maturities longterm capital leases 42 33 redeemable longterm obligations longterm debt 315 capital leases 273 notes payable 25 23 subtotal2 5606 5814 reclassified longterm debt 1800 total shortterm debt 3806 4014 1weighted average interest rates december 31 1995 1994 60 respectively including effect interest rate swaps 2weighted average interest rates december 31 1995 1994 59 respectively including effect interest rate swaps redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company entered interest rate swaps portion shortterm debt december 31 1995 1994 company agreed swap notional amounts 1050 700 respectively floating rate debt fixed rates effect swaps companys interest expense material note 16 longterm debt chevron one wholly owned subsidiaries shelf registrations file securities exchange commission sec together would permit issuance 1300 debt securities pursuant rule 415 securities act 1933 yearend 1995 company 4425 committed credit facilities banks worldwide 1800 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings agreements based either london interbank offered rate reserve adjusted domestic certificate deposit rate amounts outstanding credit agreements year yearend december 31 1995 1994 company classified 1800 shortterm debt longterm settlement obligations expected require use working capital 1996 company intent ability refinance debt longterm basis december 31 1995 1994 811 amortizing notes due 20041 750 745 notes due 2004 348 9375 sinkingfund debentures due 2016 278 56 notes due 1998 190 975 sinkingfund debentures due 2017 180 4625 200 million swiss franc issue due 19972 173 152 761 notes due 2003 160 710 serial notes due 1996199713 100 150 692 notes due 2005 51 longterm obligations 7113 less 50 individually 166 183 foreign currency obligations 463 80 58 total including debt due within one year 2476 2289 debt due within one year 143 134 reclassified shortterm debt 603 1800 total longterm debt 4133 3955 1guarantee esop debt 2an interest rate swap effectively changed fixed interest rate floating rate 224 425 yearend 1995 1994 3weighted average interest rates december 31 1995 consolidated longterm debt maturing five years december 31 1995 follows 1996143 1997291 1998301 1999124 2000 121 note 17 employee benefit plans pension plans company defined benefit pension plans employees principal plans provide automatic membership noncontributory basis retirement benefits provided plans based primarily years service average career earnings highest consecutive three years average earnings companys policy fund least minimum necessary satisfy requirements employee retirement income security act net pension credit expense companys pension plans years 1995 1994 1993 consisted 1995 1994 1993 cost benefits earned year 99 97 103 interest cost projected benefit obligations 273 263 276 actual return plan assets 728 62 472 net amortization deferral 342 294 101 net pension credit expense 14 4 8 settlement gains 1995 1994 related lumpsum payments totaled 7 17 respectively 1993 company recognized net settlement loss 63 curtailment loss 4 reflecting termination former gulf pension plan lumpsum payments company pension plans december 31 1995 1994 weighted average discount rates long term rates compensation increases used estimating benefit obligations expected rates return plan assets follows 1995 1994 assumed discount rates 74 88 assumed rates compensation increases 51 expected return plan assets 91 101 fs25 note 17 employee benefit plans continued pension plans assets consist primarily common stocks bonds cash equivalents interests real estate investment funds funded status companys combined plans december 31 1995 1994 follows plans assets accumulated excess benefits accumulated excess benefits plan assets december 31 1995 1994 1995 1994 actuarial present value vested benefit obligations 2961 2596 218 186 accumulated benefit obligations 3085 2680 230 194 projected benefit obligations 3557 3053 259 222 plan assets fair values 4020 3626 13 plan assets greater less projected benefit obligations 463 573 246 222 unrecognized net transition assets liabilities 240 294 15 18 unrecognized net gains losses 29 178 65 54 unrecognized priorservice costs 94 113 9 6 minimum liability adjustment 75 80 net pension cost prepaid accrued 288 214 232 224 net transition assets liabilities generally amortized straightline method 15 years profit sharingsavings plan savings plus plan eligible employees company certain subsidiaries completed one year service may participate profit sharing savings plan savings plus plan charges expense profit sharing part profit sharing savings plan savings plus plan 99 75 95 1995 1994 1993 respectively employee stock ownership plan esop december 1989 company established esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock esop provides partial prefunding companys future commitments profit sharing part plan result annual income tax savings company esop expected satisfy companys obligations profit sharing part plan next nine years allowed aicpa statement position sop 936 company elected continue practices based sop 763 subsequent consensuses emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations company recorded expense esop 67 42 60 1995 1994 1993 respectively including 68 71 74 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 50 47 1995 1994 1993 respectively company made contributions esop 69 63 57 1995 1994 1993 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated profit sharing accounts plan participants based debt service deemed paid year proportion total current year remaining debt service compensation expense 1 10 17 1995 1994 1993 respectively esop shares december 31 follows thousands 1995 1994 allocated shares 7223 5969 unallocated shares 19490 21208 total esop shares 26713 27177 broadbased employee stock options 1996 company granted eligible employees 150 stock options equivalents become exercisable within three years price chevron stock reaches 75 company highest annual total stockholder return competitor group years 19941998 management incentive plans company two incentive plans management incentive plan mipand longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip makes outright distributions cash services rendered deferred awards form stock units beginning awards deferred 1996 stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants stock options become exercisable earlier one year later 10 years date grant addition 1996 portion ltip options granted terms similar broadbased employee stock options discussed maximum number shares common stock may granted year one percent total outstanding shares common stock january 1 year december 31 1995 7074852 shares option exercise prices ranging 319375 48375 per share stock option transactions 1995 1994 follows fs26 note 17 employee benefit plans continued december 31 thousands shares 1995 1994 outstanding january 1 5845 4303 granted 1806 1770 exercised 498 140 forfeited 78 88 outstanding december 31 7075 5845 exercisable december 31 5339 4152 charges expense combined management incentive plans 45 31 36 1995 1994 1993 respectively benefit plans addition providing pension benefits company makes contributions toward certain health care life insurance plans active qualifying retired employees substantially employees united states certain international locations may become eligible coverage benefit plans companys annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonpension postretirement benefits funded company incurred reconciliation funded status benefit plans follows december 31 1995 december 31 1994 health life total health life total accumulated postretirement benefit obligation apbo retirees 467 328 795 480 262 742 fully eligible active participants 144 81 225 120 57 177 active participants 211 51 262 190 37 227 total apbo 822 460 1282 790 356 1146 fair value plan assets apbo greater plan assets 822 460 1282 790 356 1146 unrecognized net gain loss 179 25 154 195 66 261 accrued postretirement benefit costs 1001 435 1436 985 422 1407 companys net postretirement benefits expense follows 1995 1994 1993 health life total health life total health life total cost benefits earned year 15 3 18 23 4 27 23 3 26 interest cost benefit obligation 67 30 97 71 31 102 76 30 106 net amortization gain loss 9 2 11 net post retirement benefits expense 73 31 104 94 35 129 99 33 132 measurement purposes separate health care costtrend rates utilized preage 65 postage 65 retirees 1996 annual rates change assumed 37 percent 18 percent respectively increasing 83 percent 75 percent 1997 gradually decreasing thereafter average ultimate rates 56 percent 2005 preage 65 45 percent 2005 postage 65 increase assumed health care costtrend rates one percent year would increase aggregate service interest costs year 1995 13 would increase december 31 1995 accumulated postretirement benefit obligation apbo 113 december 31 1995 weighted average discount rate 725 percent assumed rate compensation increase related measurement life insurance benefit 50 percent note 18 contingent liabilities commitments us federal income tax california franchise tax liabilities company settled 1976 1987 respectively federal income tax purposes issues allocation state income taxes creditability taxes paid government indonesia resolved 1987 tax court decision 1995 confirmed validity tax regulations allocating state income taxes company currently working internal revenue service agree methodology could apply years indonesia issue applies years 1982 amounts dispute irs significant settlement open tax matters expected material effect consolidated net assets liquidity company opinion management adequate provision made income franchise taxes years either examination subject future examination december 31 1995 company subsidiaries direct indirect guarantors contingent liabilities 100 notes affiliated companies 77 notes others company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments throughput agreements fs27 note 18 contingent liabilities commitments continued takeorpay agreements relate suppliers financing arrangements aggregate amount required payments various commitments 1996177 1997156 1998140 1999118 200090 2001 after509 total payments agreements 173 1995 154 1994 142 1993 march 1992 agency within department energy doe issued proposed remedial order pro claiming chevron failed comply doe regulations course participation tertiary incentive program although doe regulations involved rescinded march 1981 following decontrol crude oil prices january 1981 statute authorizing regulations expired september 1981 pro purports period april 1980 april 1990 doe claimed company overrecouped regulations 125 period question currently requesting office hearings appeals oha amend amount 167 amendment granted total claim including interest december 1995 amounts 442 company asserts fact incurred loss participation doe program evidentiary hearings nobenefit argument began middecember 1994 concluded march 1995 oral arguments held august 1995 company awaiting decision oha company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemical concerns companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys related operations results carefully considered management evaluating level current future activity countries areas company significant operations include united states canada australia united kingdom congo angola nigeria papua new guinea indonesia china zaire companys caltex affiliates significant operations indonesia japan korea australia philippines singapore thailand south africa companys tengizchevroil affiliate operates kazakstan fs28 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activitiessfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables first three tables provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola zaire congo geographic category includes activities australia united kingdom north sea canada papua new guinea china countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia tengizchevroil tco exploration production company operating republic kazakstan began operations april 1993 table costs incurred exploration property acquisitions development 1 fs29 table ii capitalized costs related oil gas producing activities fs30 table iii results operations oil gas producing activities1 companys results operations oil gas producing activities years 1995 1994 1993 shown net income exploration production activities reported page fs6 reflects income taxes computed effective rate basis accordance sfas 69 income taxes based statutory tax rates reflecting allowable deductions tax credits results reported exclude allocation corporate overhead net income 1993 reported page fs6 includes allocated corporate overhead 1995 1994 interest expense excluded results reported net income amounts page fs6 fs31 table iii results operations oil gas producing activities 1 continued table iv reserve quantities information companys estimated net proved underground oil gas reserves changes thereto years 1995 1994 1993 shown following table proved reserves estimated companys asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually corporations reserves advisory committee ensure rigorous professional standards reserves definitions prescribed securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change time additional information becomes available proved reserves include additional quantities recoverable beyond term lease contract unless renewal reasonably certain may result extensions currently proved areas application secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves tengizchevroil tco companys 50 percent owned affiliate kazakstan include reserves produced dedicated export system place fs32 table iv reserve quantities information continued table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs33 table v standardized measure discounted future net cash flows related proved oil gas reserves continued table vi changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included revisions previous quantity estimates 1995 changes reflected higher yearend crude oil natural gas prices quantity increases crude oil natural gas reserves fs34 fiveyear financial summary 1 fs35 caltex group companies combined financial statements december 31 1995 c1 caltex group companies combined financial statements december 31 1995 index page general information c3 c4 independent auditors report c5 combined balance sheet c6 c7 combined statement income c8 combined statement retained earnings c9 combined statement cash flows c9 notes combined financial statements c10 c20 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc private joint venture created bahrain 1936 two owners produce transport refine market crude oil refined products group comprised following companies caltex petroleum corporation company incorporated delaware many subsidiaries affiliates conducts refining marketing transporting activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas subsidiary provides services manages certain exploration production operations indonesia chevron texaco interests necessarily jointly properties brief description companys operations groups environmental activities follows caltex petroleum corporation caltex subsidiaries affiliates caltex operates approximately 60 countries highest economic petroleum growth rates world principally africa asia middle east new zealand australia certain refining marketing operations conducted joint ventures equity interests 15 refineries 11 countries caltex share refinery inputs approximated 903000 barrels per day 1995 caltex continues improve refineries investments designed provide higher yields meet environmental regulations construction new 130000 barrels per day refinery thailand progressing completion anticipated 1996 year end 1995 caltex 7000 employees 3 located united states strong presence principal operating areas caltex average market share 179 refined product sales approximately 13 million barrels per day 1995 caltex built 97 new branded retail outlets 1995 refurbished 85 existing locations aim upgrade retail distribution network caltex conducts international crude oil refined product logistics trading operations subsidiary singapore company interest fleet vessels owns equity interests numerous pipelines terminals depots caltex also active petrochemical business particularly japan south korea p caltex pacific indonesia cpi holds production sharing contract central sumatra indonesian government granted extension year 2021 1992 cpi also acts operator four petroleum contract areas sumatra jointly held chevron texaco exploration pursued area comprising 2446 million acres production established giant minas duri fields along 72 smaller fields gross production fields operated cpi 1995 753000 barrels per day cpi entitlements sold shareholders use systems sell third parties year end 1995 cpi 6300 employees located indonesia c3 caltex group companies general information american overseas petroleum limited aopl addition providing services cpi aopl subsidiary amoseas indonesia inc manages selective contract areas texacos chevrons undivided interests indonesia excluding sumatra one contract areas dedicated geothermal reserves geothermal proved reserves darajat west java able supply 100 megawatt power generating plant 30 years production steam generation 1995 368219927 kwh 55 megawatts sold 30 year energy contract 70 megawatts electrical power generation developed sale joint operating agreement developed new indonesian partner carry geothermal business interests year end aopl 275 employees 6 located united states environmental activities groups activities subject environmental health safety regulations countries operates regulations vary significantly degree scope standards enforcement groups policy comply applicable environmental health safety laws regulations group active program ensure environmental standards maintained includes closely monitoring applicable statutory regulatory requirements well enforcement policies countries operates conducting periodic environmental compliance audits december 31 1995 group accrued 21 million various remediation activities environmental guidelines definitions promulgated american petroleum institute provide basis reporting groups expenditures year ended december 31 1995 group including equity share nonsubsidiary companies incurred capital costs 206 million nonremediation related operating expenses 139 million major component groups expenditures prevention air pollution addition december 31 1995 reserves relative future cost restoring abandoning existing oil gas properties 48 million based upon existing statutory regulatory requirements investment operating plans known exposures group believes environmental expenditures materially affect liquidity financial position results operations c4 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1995 1994 related combined statements income retained earnings cash flows years threeyear period ended december 31 1995 combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1995 1994 results operations cash flows years threeyear period ended december 31 1995 conformity generally accepted accounting principles discussed note 2 combined financial statements effective january 1 1994 group adopted provisions financial accounting standards boards statement financial accounting standards 115 accounting certain investments debt equity securities kpmg peat marwick llp dallas texas february 12 1996 c5 caltex group companies combined balance sheet december 31 1995 1994 millions dollars assets 1995 1994 current assets cash equivalents including time deposits 60 1995 136 1994 166 251 notes accounts receivable less allowance doubtful accounts 11 1995 14 1994 trade 1002 1107 238 187 nonsubsidiary companies 210 88 1450 1382 inventories crude oil 130 132 refined products 516 573 materials supplies 61 73 707 778 10 total current assets 2323 2421 investments advances nonsubsidiary companies equity 3163 2370 miscellaneous investments longterm receivables less allowance 8 1995 1994 207 198 3370 2568 property plant equipment cost producing 3485 3284 refining 1468 1787 marketing 2160 2552 9 154 7122 7777 less accumulated depreciation depletion amortization 2868 3165 4254 4612 prepaid deferred charges 170 209 total assets 10117 9810 see accompanying notes combined financial statements c6 caltex group companies combined balance sheet december 31 1995 1994 millions dollars liabilities stockholders equity 1995 1994 current liabilities notes payable banks financial institutions 1576 1229 longterm debt due within one year 89 157 accounts payable trade 1195 1240 stockholder companies 90 77 nonsubsidiary companies 74 123 1359 1440 accrued liabilities 97 113 estimated income taxes 102 133 total current liabilities 3223 3072 longterm debt 628 715 accrued liability employee benefits 98 113 deferred credits noncurrent liabilities 864 789 deferred income taxes 209 236 minority interest subsidiary companies 136 152 stockholders equity common stock 355 additional paidin capital 2 retained earnings 4187 3898 currency translation adjustment 350 399 unrealized holding gain investments 65 79 total stockholders equity 4959 4733 commitments contingent liabilities total liabilities stockholders equity 10117 9810 see accompanying notes combined financial statements c7 caltex group companies combined statement income years ended december 31 1995 1994 1993 millions dollars 1995 1994 1993 sales operating revenues1 15067 14751 15409 operating charges cost sales operating expenses2 13045 12801 13431 selling general administrative expenses 620 568 496 depreciation depletion amortization 361 331 295 maintenance repairs 104 160 170 14130 13860 14392 operating income 937 891 1017 income deductions equity net income nonsubsidiary companies 425 263 140 dividends interest income 130 134 99 foreign exchange net 37 73 23 interest expense 159 101 93 minority interest subsidiary companies 4 3 8 429 220 161 income provision income taxes 1366 1111 1178 provision income taxes current 449 467 433 deferred 18 45 25 total provision income taxes 467 422 458 net income 899 689 720 1 includes sales stockholder companies 1376 1250 943 nonsubsidiary companies 1524 1044 944 2 includes purchases stockholder companies 1834 1662 2410 nonsubsidiary companies 1638 1587 1356 see accompanying notes combined financial statements c8 caltex group companies combined statement retained earnings years ended december 31 1995 1994 1993 millions dollars 1995 1994 1993 balance beginning year 3898 3688 3310 net income 899 689 720 cash dividends 610 479 342 balance end year 4187 3898 3688 combined statement cash flows years ended december 31 1995 1994 1993 millions dollars 1995 1994 1993 operating activities net income 899 689 720 adjustments reconcile net income net cash provided operating activities depreciation depletion amortization 361 331 295 dividends nonsubsidiary companies less equity net income 349 220 103 net gainslosses asset sales 11 17 4 deferred income taxes 18 45 25 prepaid charges deferred credits 69 115 41 changes operating working capital 27 58 31 66 77 10 net cash provided operating activities 1048 988 933 investing activities capital expenditures 663 837 763 investments advances nonsubsidiary companies 150 131 149 net purchasessales investment instruments 7 14 21 proceeds asset sales 46 37 73 net cash used investing activities 774 917 860 financing activities proceeds borrowings original terms excess three months 1063 1257 745 repayments borrowings original terms excess three months 1093 880 704 net increase borrowings 275 135 140 dividends paid including minority interest 617 482 342 net cash provided used financing activities 372 30 161 effect exchange rate changes cash equivalents 13 16 15 net change cash equivalents 85 73 cash equivalents beginning year 251 166 239 cash equivalents end year 166 251 166 see accompanying notes combined financial statements c9 caltex group companies notes combined financial statements 1 summary significant accounting policies principles combination combined financial statements caltex group companiesgroup include accounts caltex petroleum corporation subsidiaries american overseas petroleum limited subsidiary pt caltex pacific indonesia elimination intercompany balances transactions subsidiaries include companies owned directly indirectly 50 percent except cases control rest group subsidiary chevron corporation two subsidiaries texaco inc stockholders 50 outstanding common shares group companies group primarily engaged exploring producing refining marketing crude oil refined products eastern hemisphere group employs accounting policies accordance generally accepted accounting principles united states translation foreign currencies us dollar functional currency principal subsidiary operations nonsubsidiary companies japan korea use local currency functional currency estimates preparation financial statements conformity generally accepted accounting principles requires management make estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results could differ estimates group believes effects changes near term would material impact financial statements inventories crude oil refined product inventories stated lower cost primarily determined lastin firstout lifo method current market value costs include applicable purchase refining costs duties import taxes freight etc materials supplies valued average cost investments advances investments advances nonsubsidiary companies 20 50 voting stock owned group ability exercise significant influence accounted equity method groups equity earnings losses companies included current results related investments reflect equity book value underlying net assets investments nonsubsidiary companies carried cost related dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing area including intangible development costs computed using unitofproduction method c10 caltex group companies notes combined financial statements 1 summary significant accounting policies continued assets depreciated class uniform straightline basis depreciation rates based upon estimated useful life class property maintenance repairs necessary maintain facilities operating condition charged income incurred additions betterments materially extend life properties capitalized upon disposal properties net gain loss included income derivative financial instruments gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income environmental matters compliance environmental regulations determined consideration existing laws countries group operates groups internal standards group capitalizes expenditures create future benefits contribute future revenue generation remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available nondiscounted estimated costs using data developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realizable reclassifications certain amounts reclassified preceding periods conform current years presentation 2 changes accounting principles group adopted statement financial accounting standards sfas 115 accounting certain investments debt equity securities effective january 1 1994 sfas 115 requires investments equity securities readily determinable fair values investments debt securities classified three categories based managements intent investments reported fair value except debt securities intended held maturity reported amortized cost previously investments accounted amortized cost cumulative effect change january 1 1994 increase stockholders equity 70 million related taxes representing unrealized net gains applicable securities categorized availablefor sale new standard securities primarily held nonsubsidiary companies accounted equity method effective october 1 1995 group adopted sfas 121 accounting impairment longlived assets longlived assets disposed sfas 121 establishes guidelines recognizing measuring impairment longlived assets adoption standard impact combined financial statements group c11 caltex group companies notes combined financial statements 3 inventories excess current cost stated value inventory maintained lifo basis approximately 52 million 56 million december 31 1995 1994 respectively 1995 1994 1993 inventory quantities maintained lifo basis reduced certain locations inventory reductions net market valuation adjustments resulted decrease earnings consolidated subsidiaries nonsubsidiary companies equity approximately 1 million 8 million 1995 1994 respectively increase 1 million 1993 charges 104 million reduced income 1993 reflect market value certain inventories lower lifo carrying value earnings 25 million 30 million net inventory reduction effects recorded 1995 1994 respectively reflect partial recovery prior year charges 4 nonsubsidiary companies equity investments advances nonsubsidiary companies equity december 31 include following millions equity share 1995 1994 nippon petroleum refining company limited 50 1132 997 koa oil company limited 50 427 448 honam oil refinery company limited 50 762 557 australian petroleum pty limited 50 412 star petroleum refining company ltd 64 327 266 various 103 102 3163 2370 effective may 1995 caltex australia limited cal subsidiary group combined petroleum refining marketing operations ampol limited competitor form australian petroleum pty limited appl owns manages combined refining marketing operations cal contributed net assets carrying value 419 million 50 equity interest appl cals petroleum refining marketing net assets contributed historical basis gain loss recognized transaction carrying value cals investment appl exceeds proportionate share appls net equity excess amortized period 20 years remaining interest star petroleum refining company ltd sprc owned thailand governmental entity due provisions sprc shareholder agreement control sprc rest group addition groups degree ownership temporary sprc construction operation agreement governments ministry industry group stipulates group must reduce interest sprc minority share year 2000 c12 caltex group companies notes combined financial statements 4 nonsubsidiary companies equity continued shown summarized combined financial information nonsubsidiary companies millions 100 equity share 1995 1994 1995 1994 current assets 7125 5352 3556 2651 assets 10415 7821 5368 3858 current liabilities 5608 4940 2804 2363 liabilities 5865 3504 3039 1776 net worth 6067 4729 3081 2370 100 equity share 1995 1994 1993 1995 1994 1993 operating revenues 15396 10886 10679 7674 5418 5304 operating income 955 770 494 472 381 242 net income 859 526 281 425 263 140 1995 nonsubsidiary company group sold certain property required local government nonsubsidiary compensated value property transferred cost replacing operating assets affected transfer compensation fully utilized reconstruction program five year period excess compensation net book value property dismantled operating assets recognized 1995 earnings nonsubsidiary groups aftertax equity share gain 1715 million retained earnings december 31 1995 1994 includes 17 billion 14 billion respectively representing groups share undistributed earnings nonsubsidiary companies equity cash dividends received nonsubsidiary companies 76 million 43 million 37 million 1995 1994 1993 respectively sales 50 percent owner nippon petroleum refining company limited products refined nippon petroleum refining company limited koa oil company limited approximately 21 billion 2 billion 19 billion 1995 1994 1993 respectively december 6 1995 group signed memorandum understanding nippon oil company limited noc sell groups interest nippon petroleum refining company limited subsequently january 30 1996 group signed binding agreements sale scheduled closing april 1 1996 agreed proceeds 200 billion yen approximately 2 billion impact groups earnings 1996 currently estimated net aftertax gain approximately 650 million inclusive impact forward exchange contract hedge c13 caltex group companies notes combined financial statements 5 notes payable shortterm financing consists primarily demand loans promissory notes acceptance credits overdrafts weighted average interest rates shortterm financing december 31 1995 1994 70 68 respectively unutilized lines credit available shortterm financing totaled 844 million december 31 1995 6 longterm debt longterm debt related interest rates december 31 1995 consist following millions 1995 1994 us dollars variable interest rate term loans 243 233 fixed interest rate term loans 67 average rate 58 206 australian dollars variable interest rate term loan 50 promissory notes payable 76 average rate 19 81 fixed interest rate loans 112 rate due 20012002 230 132 38 new zealand dollars variable interest rate term loans 13 16 15 9 628 715 december 31 1995 1994 19 million 124 million respectively shortterm borrowings classified longterm debt settlement obligations expected require use working capital 1996 group intent ability refinance debt longterm basis december 31 1995 1994 19 million 170 million respectively longterm committed credit facilities available major banks support notes payable classified longterm debt aggregate maturities longterm debt next five years follows millions 1996 89 included combined balance sheet current liability excluding shortterm borrowings classified longterm debt 1997 56 1998 70 1999 95 2000 97 2001 thereafter 310 c14 caltex group companies notes combined financial statements 7 employee benefits group retirement plans covering substantially eligible employees generally plans provide defined benefits based final average pay defined benefit levels vesting terms funding practices vary among plans funded status retirement plans primarily foreign inclusive nonsubsidiary companies equity december 31 follows millions assets exceed accumulated benefits funding status benefits exceed assets 1995 1994 1995 1994 actuarial present value vested benefit obligation 186 224 215 194 accumulated benefit obligation 208 248 251 229 projected benefit obligation 362 408 308 amount assets available benefits funded assets fair value 341 385 123 109 net pension asset liability recorded 23 22 146 149 total assets 318 363 269 258 assets less projected benefit obligation 44 45 39 50 consisting unrecognized transition net assets liabilities 13 21 5 7 unrecognized net losses 38 39 30 40 unrecognized prior service costs 19 27 4 3 weighted average rate assumptions discount rate 105 51 63 rate increase compensation 82 79 31 44 expected return plan assets 101 108 45 55 components pension expense 1995 1994 1993 cost benefits earned year 32 27 interest cost projected benefit obligation 55 58 actual return plan assets 47 23 59 net amortization deferral 12 16 total 52 43 42 c15 caltex group companies notes combined financial statements 8 operating leases group various operating leases involving service stations equipment facilities net rental expense 91 million 121 million 110 million 1995 1994 1993 respectively future net minimum rental commitments operating leases non cancelable terms excess one year follows millions 1996 35 1997 37 1998 38 1999 40 2000 41 2001 thereafter 73 9 commitments contingencies january 25 1990 caltex petroleum corporation certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer lawsuit filed houston texas state court removal federal district court houston litigations disposition turned questions federal court jurisdiction whether case dismissed forum non conveniens plaintiffs petition purported class action behalf least 3350 parties either survivors next kin persons deceased collision philippine waters december 20 1987 one vessel involved collision carrying group products connection freight contract although group direct indirect ownership operational responsibility either vessel various theories liability alleged group specific monetary recovery sought although petition contained variety demands various categories compensatory well punitive damages consequently reasonable estimate damages involved sought made issues resolved groups favor federal district court march 1992 forum non conveniens dismissal subsequent dismissal consistent terms cases filed group entities philippine courts previously filed subsequent collision various stages litigation vigorously resisted however notwithstanding houston federal district court dismissal plaintiffs filed another lawsuit alleging causes action texas litigation louisiana state court new orleans group removed case federal district court new orleans remanded back louisiana state court group sought injunctive relief federal district court houston order ensure courts previous dismissal would given proper effect request relief denied group filed expedited appeal us fifth circuit court appeals court january 1996 affirmed federal district courts refusal enjoin plaintiffs proceeding louisiana lawsuit group filed requests rehearing fifth circuit three judge panel heard case additionally en banc consideration case entire fifth circuit management contesting case vigorously group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third party insurance group also involved certain litigation internal revenue service tax audits could involve significant payments items ultimately resolved adversely group c16 caltex group companies notes combined financial statements 9 commitments contingencies continued impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position results operations liquidity unconditional purchase obligations 1993 considered material however april 1994 group subsidiary entered contractual commitment effective october 1996 period eleven years purchase refined products conjunction financing refinery presently construction nonsubsidiary company total future estimated commitments billions group similar contracts based current pricing projected growth rates 1996 11 1997 11 1998 12 1999 13 2000 13 2001 expiration contracts 61 purchases billions similar contracts 5 6 1995 1994 1993 respectively 10 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk december 31 group commitments outstanding interest rate swaps foreign currency transactions notional contractual amounts follows millions 1995 1994 interest rate swaps pay fixed receive floating 485 363 interest rate swaps pay floating receive fixed 230 182 commitments purchase foreign currencies 439 252 commitments sell foreign currencies 2001 274 group enters interest rate swaps managing interest rate risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities ten years unrealized gains losses contracts outstanding yearend 1995 1994 material group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments forward exchange contracts hedging existing liabilities maturities seven years contracts hedging firm commitments maturities year contracts december 31 1995 primarily reflect hedge agreed proceeds 200 billion yen approximately 2 billion april 1 1996 sale groups interest nippon petroleum refining company limited nonsubsidiary december 31 1995 estimated unrealized exchange gain hedge 42 million unrealized gains losses applicable remaining forward exchange contracts december 31 1995 contracts december 31 1994 immaterial since forward rates approximated yearend spot rates groups activity commoditybased derivative contracts must settled cash material unrealized gains losses commodity based derivative contracts outstanding yearend 1995 1994 material c17 caltex group companies notes combined financial statements 10 financial instruments continued groups longterm debt 628 million 715 million december 31 1995 1994 respectively fair values 639 million 707 million december 31 1995 1994 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents notes accounts receivable current liabilities approximate fair value short maturity group investments debt securities availableforsale amortized costs 65 million 63 million december 31 1995 1994 respectively investments debt securities held maturity amortized costs 14 million 77 million december 31 1995 1994 respectively fair value securities december 31 1995 1994 approximates amortized costs december 31 1995 1994 investments debt securities availableforsale maturities less ten years investments debt securities held maturity maturities less one year december 31 1995 1994 groups carrying amount investments nonsubsidiary companies accounted equity included 65 million 83 million respectively netoftax unrealized net gains investments held nonsubsidiaries group commitments 12 million 99 million december 31 1995 1994 respectively form letters credit issued behalf group companies facilitate either groups parties ability trade normal course business addition group contingently liable december 31 1995 maximum 192 million precompletion sponsor support project finance obligations nonsubsidiary considering status construction december 31 1995 need precompletion sponsor support unlikely group become contingently liable postcompletion support project finance obligations nonsubsidiary met certain plant physical completion requirements group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentrations risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer country considered sufficient credit losses historically within managements expectations 11 taxes charged income consist following millions 1995 1994 1993 taxes income taxes duties import excise taxes 1660 2384 1978 29 32 29 total taxes income taxes 1689 2416 2007 provision income taxes 467 422 458 2156 2838 2465 c18 caltex group companies notes combined financial statements 11 taxes continued provision income taxes substantially foreign computed individual company basis rates effect various countries operation actual tax expense differs expected tax expense computed applying us federal corporate tax rate income provision income taxes follows 1995 1994 1993 computed expected tax expense 350 effect recording equity net income nonsubsidiary companies tax basis 109 83 42 effect dividends received subsidiary nonsubsidiary companies 29 44 42 foreign income subject foreign taxes excess us statutory tax rate 83 69 74 increasedecrease deferred tax asset valuation allowance 6 3 31 17 3 4 342 380 389 deferred income taxes provided temporary differences financial reporting basis tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax assets liabilities december 31 1995 1994 follows millions deferred tax assets tax liabilities 1995 1994 1995 1994 inventory 4 17 9 12 depreciation 306 310 retirement plans 29 34 3 2 tax loss carryforwards 24 27 investment allowances 62 40 43 30 44 41 162 148 362 365 valuation allowance 17 9 total deferred taxes 145 139 362 365 group classifies deferred taxes net current net noncurrent based balance sheet classification related assets liabilities deferred taxes classified combined balance sheet current liabilities included estimated income taxes 8 million noncurrent liabilities 209 million december 31 1995 current assets 10 million noncurrent liabilities 236 million december 31 1994 c19 caltex group companies notes combined financial statements 11 taxes continued valuation allowance established record deferred tax assets amounts recoverability likely net income decreased 1995 1994 8 million 3 million respectively increased 36 million 1993 changes deferred tax asset valuation allowance undistributed earnings deferred income tax provision made approximated 41 billion december 31 1995 38 billion december 31 1994 earnings intended indefinitely reinvested earnings would become taxable us upon remittance dividends practical estimate amount tax might payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability 12 cash flows purposes statement cash flows highly liquid debt instruments original maturities three months less considered cash equivalents changes operating working capital consists following millions 1995 1994 1993 notes accounts receivable 42 97 82 inventories 89 37 66 accounts payable 15 152 147 accrued liabilities 31 16 estimated income taxes 26 24 14 total 27 58 31 net cash provided operating activities includes following cash payments interest income taxes millions 1995 1994 1993 interest paid net capitalized interest 144 94 92 income taxes paid 466 444 391 1995 caltex australia limited exchanged noncash investing transaction petroleum refining marketing net assets 419 million investment australian petroleum pty limited nonsubsidiary group significant noncash investing financing transactions occurred 1994 1993 13 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures equity affiliates accordingly disclosures presented herein c20item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs14 consolidated statement income three years ended december 31 1998 fs14 consolidated statement comprehensive income three years ended december 31 1998 fs14 consolidated balance sheet december 31 1998 1997 fs15 consolidated statement cash flows three years ended december 31 1998 fs16 consolidated statement stockholders equity three years ended december 31 1998 fs17 notes consolidated financial statements fs18 fs31 2 financial statement schedules caltex group companies combined financial statements c1 c27 combined financial statements caltex group companies filed part report schedules omitted applicable required information included combined financial statements notes thereto 3 exhibits exhibit index pages 29 30 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k dated november 23 1998 filed company november 25 1998 report chevron announced new stockholder rights agreement associated rights dividend payable shares chevrons common stock 2 current report form 8k dated january 26 1999 filed company january 26 1999 report chevron announced preliminary unaudited earnings year ended december 31 1998 3 current report form 8k dated february 2 1999 filed company february 2 1999 report chevron filed consents independent accountants 4 current report form 8k dated march 8 1999 filed company march 8 1999 report chevron announced revised earnings year ended december 31 1998 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 31st day march 1999 chevron corporation kenneth derr kenneth derr chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 31st day march 1999 principal executive officers directors kenneth derr samuel h armacost kenneth derr chairman board samuel h armacost james n sullivan sam ginn james n sullivan vicechairman board sam ginn david j oreilly carla hills david j oreilly vicechairman board carla hills j bennett johnston j bennett johnston richard h matzke principal financial officer richard h matzke martin r klitten charles pigott martin r klitten vicepresident charles pigott chief financial officer condoleezza rice principal accounting officer condoleezza rice stephen j crowe frank shrontz stephen j crowe comptroller frank shrontz changlin tien changlin tien george h weyerhaeuser george h weyerhaeuser lydia beebe john young lydia beebe attorneyinfact john young exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated november 23 1998 32 bylaws chevron corporation amended november 23 1998 41 rights agreement dated november 23 1998 chevron corporation chasemellon shareholder services llc rights agent filed exhibit 41 chevron corporations current report form 8k dated november 23 1998 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective october 30 1996 filed appendix b chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 102 chevron corporation excess benefit plan amended restated july 1 1996 filed exhibit 10 chevron corporations report form 10q quarterly period ended march 31 1997 incorporated herein reference 103 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 104 chevron restricted stock plan nonemployee directors amended restated effective april 30 1997 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 105 chevron corporation longterm incentive plan amended restated effective october 30 1996 filed appendix c chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 106 chevron corporation salary deferral plan management employees effective january 1 1997 filed exhibit 10 chevron corporations report form 10q quarterly period ended june 30 1997 incorporated herein reference exhibit index continued exhibit description 121 computation ratio earnings fixed charges page e1 211 subsidiaries chevron corporation page e2 231 consent pricewaterhousecoopers llp page e3 232 consent kpmg llp page e4 241 powers attorney directors certain officers chevron corporation authorizing signing annual report 2416 form 10k behalf 271 financial data schedule 991 definitions selected financial terms page e5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 575 market street san francisco california 94105 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs2 fs12 quarterly results stock market data fs13 report management fs13 consolidated statement income fs14 consolidated statement comprehensive income fs14 report independent accountants fs14 consolidated balance sheet fs15 consolidated statement cash flows fs16 consolidated statement stockholders equity fs17 notes consolidated financial statements fs18 fs31 supplemental information oil gas producing activities fs32 fs37 fiveyear financial summary fs38 fs1 managements discussion analysis financial condition results operations 1998 key indicators net income 1339 billion 1998 declined 59 percent 1997s record level average 1998 us crude oil realizations declined 35 percent 1142 per barrel lowest 20 years average 1998 us natural gas realizations declined 17 percent 202 per thousand cubic feet international liquids production increased ninth consecutive year increasing 7 percent 1998 operating selling general administrative expenses 1998 excluding special items declined 300 million worldwide net oil gas reserve additions exceeded production sixth consecutive year annual dividends increased 11th consecutive year key financial results chevrons net income 1998 1339 billion 59 percent record earnings 3256 billion 1997 49 percent 2607 billion 1996 excluding special items earnings 1998 1945 billion 39 percent 3180 billion 1997 27 percent 2651 billion 1996 foreign currency losses 47 million 1998 compared gains 246 million 1997 losses 26 million 1996 net income 1998 compared 1997 1996 also included favorable effects income tax adjustments including resulting finalization companys 1997 us federal income tax return larger net gains property sales higher proceeds favorable settlements insurance claims net income companys individual business segments discussed results operations section operating environment outlook crude oil prices fell dramatically 1997 1998 average prices 1998 reaching lowest levels 20 years price spot west texas intermediate wti crude oil averaged 2215 per barrel 1996 prices fell throughout 1997 averaging 2060 per barrel year downward price trend continued throughout 1998 crude oil prices 13 15 range year average spot wti price 1998 fell 1438 per barrel year 1128 month december prices improved significantly 1999 averaging 1224 per barrel february closing 1335 march 4 1999 chevrons us crude oil realizations averaged 1142 per barrel 1998 35 percent 39 percent average realizations 1997 1996 respectively number factors continue exert downward pressure crude oil prices worldwide supplies increased startups new producing fields higher production existing fields growth demand slowed resulting oversupplied world market addition inventories early 1999 remained high uncertain long conditions continue low crude oil prices persist could hold companys revenues earnings particularly exploration production upstream operations company expect significant improvements prices crude oil natural gas commodity chemicals near term help offset impact low prices chevron intends reduce cost structure additional 500 million 1999 selectively investing areas provide greatest opportunities growth 1999 chevron intends focus capital spending international exploration production projects company considers growth engine future however timely completion planned projects dependent upon among factors ability partners national petroleum companies fund share costs company expects minimize capital spending international chemicals downstream refining marketing transportation businesses increases oil equivalent gas oeg production primarily companys international areas west africa offshore eastern canada indonesia uk north sea helped offset partially effects low crude oil natural gas prices additional oil gas production increases expected next years developments west africa hibernia prospects offshore eastern canada deep waters us gulf mexico continued expansion production tengiz field kazakhstan chevrons us refining marketing transportation business affected adversely lower product margins 1998 september hurricane closed companys pascagoula mississippi refinery 1998 fourth quarter factors offset partially higher refined products sales volumes lower operating expenses international refining marketing transportation segment companys caltex affiliates earnings continue affected economic slowdown asiapacific region fluctuations value fs2 asian currencies western canada retail product margins declined 1998 result increased competition cyclical downturn began worldwide chemicals industry second half 1995 continues 1999 companys operating earnings chemicals operations continued decline 1998 prices chemicals products remain depressed reflecting industry overcapacity stagnant demand especially asia increasing inventories significant developments chevrons 1998 worldwide net proved barrels oeg reserves additions exceeded production sixth consecutive year worldwide net proved oeg reserves replacement 119 percent 1998 excluding sales acquisitions worldwide oeg production 2 percent 1998 international net liquids production increasing 7 percent total liquids production tengiz field kazakhstan 1998 averaged 188000 barrels per day bpd increase 21 percent 1997 average production 155000 bpd production field averaged 218000 bpd december 1998 chevron operates facilities tengiz tengizchevroil company 45 percent ownership interest final local government approvals secured late 1998 permitting construction begin 1999 caspian pipeline consortiums cpc pipeline deliver crude oil tengiz field black sea port novorossiysk chevron 15 percent interest cpc completion pipeline 2001 provide additional transportation outlets kazakh crude oil critical future expansion production capacity tengiz field daily rate production block 0 angola chevron 39 percent interest reached record 514000 bpd december 1998 new production commenced year south nemba lomba fields deepwater angola block 14 company 31 percent interest third fourth commercial discoveries made 1998 first production block 14 expected yearend 1999 initial phase kuito field development company prepares overall block 14 development plan chevrons share net liquids production nigeria declined slightly 150000 bpd 1998 result opecdirected production curtailments new production began dibi gbokoda opolo oil fields year early 1999 government nigeria announced fund portion budgets submitted oil gas activities 1999 new exploration development projects well ongoing projects may delayed result funding decision offshore eastern canada hibernia field completed first full year operation 1998 production averaged 65000 bpd daily peaks 100000 bpd yearend additional development drilling gas injection hibernia peak daily production rates expected reach 150000 bpd 1999 chevron holds 269 percent interest hibernia international average natural gas production increased 14 percent 1998 primarily reflecting increases united kingdom nigeria august 1998 natural gas production began britannia field chevron holds 302 percent interest uk north sea december 1998 field produced 600 million cubic feet gas per day 45000 barrels per day condensate nigeria phase 2 escravos gas project construction escravos gas project processes natural gas previously flared atmosphere liquefied petroleum gas use domestic market condensate export company signed agreements explore qatar bahrain first quarter 1998 quarter production began moran gobe fields papua new guinea december chevron announced executed purchase agreement rutherfordmoran oil corporation owns 46 percent interest block b832 gulf thailand acquisition southeast asia may lead investments area chevron acquired 66 additional deepwater tracts us federal lease sales year furthering intent major participant development us gulf mexico deep waters companys deepwater inventory consisted 428 tracts yearend 1998 construction installation production facilities companys first deepwater gulf operation genesis completed production began january 1999 chevron operator 57 percent working interest another companys deepwater projects gemini expected begin production later 1999 chevron completed sale platforms gail grace located federal waters southeast end santa barbara channel associated platformtoshore pipelines february 1999 march 1999 company received approval partners sell interests producing processing transportation assets point arguello area completing sale entire offshore california operations february 1999 chevron unit atlantic richfield arco permian announced agreement exclusively pursue combination two companies oil gas producing assets permian basin west texas southeast new mexico final agreement reached arco chevron 50 percent new company headquartered midland texas new entity expected develop produce oil natural gas market crude oil natural gas natural gas liquids related products permian basin operations consist 7000 wells 150 fields representing 600 million barrels proved reserves producing 170000 bpd oil equivalents addition company would produce transport market carbon dioxide assets contributed arco chevron colorado chevron chemical company began commercial production january 1999 new 215 million singapore plant largest fuel lubricating additives manufacturing plant asia plant manufacture 26 additive components 40 different raw materials make 150 additive package blends tailored customer needs company expects begin commercial sales singapore plant march 1999 january 1 1999 11 15 member countries european union began converting euro establishing fixed conversion rates existing sovereign currencies euro chevron evaluated fs3 impact conversion euro concluded based companys current level activity conversion material impact business financial condition year 2000 problem year 2000 problem result computer systems equipment embedded chips processors using two digits rather four define specific year potentially unable process accurately certain data 2000 could result system failures miscalculations causing disruptions various activities operations chevron established corporatelevel year 2000 project team coordinate efforts teams companys operating units corporate departments address year 2000 issue three major areas information technology embedded systems supply chain information technology includes computer hardware systems software used throughout companys facilities embedded systems exist automated equipment associated software used companys exploration production facilities refineries transportation operations chemical plants business operations supply chain includes third parties chevron conducts business company also monitoring year 2000 efforts equity affiliates jointventure partners progress reports year 2000 project presented regularly companys senior management periodically board audit committee company addressing year 2000 issue three overlapping phases 1 identification assessment critical equipment software systems business relationships may require modification replacement prior 2000 2 resolution critical items remediation testing modifications replacement development alternative business processes 3 development contingency business continuation plans critical items mitigate disruptions companys operations chevron intends address critical items prior 2000 phase 1 identification assessment essentially complete company estimates december 31 1998 completed approximately 30 percent phase 2 activities phase 2 expected 75 percent complete end second quarter 1999 essentially finished end third quarter 1999 phase 3 also scheduled completion end third quarter company using riskbased analysis operations identify items deemed mission critical defined potential significant adverse effects one five areas environmental safety ongoing business relationships financial legal exposure company credibility image date 300 items varying degrees complexity companys operations 1000 thirdparty relationships deemed missioncritical many missioncritical items already found compliant others undergoing remediation testing companys major financial systems desktop computer systems upgraded separate projects already compliant chevron corresponding missioncritical third parties expects meet large percentage either alone potentially affected parties determine relative risks major year 2000related problems determine mitigate risks additional items thirdparty relationships may added removed population information becomes available using practical risk assessment testing techniques chevron dividing list 300 internal items three categories 1 expected tested made year 2000 compliant prior 2000 2 items removed service without testing replaced year 2000 compliant items 3 items worked around found year 2000 compliant items replaced made compliant scope chevrons operations company believes impractical eliminate potential year 2000 problems arise result chevron expects non missioncritical items year 2000 remedial efforts continue year 2000 normal course business company developed maintains extensive contingency plans respond equipment failures emergencies business interruptions however contingency planning year 2000 issues complicated possibility multiple simultaneous incidents could significantly impede efforts respond emergencies resume normal business functions incidents may outside companys control example missioncritical third parties successfully address material year 2000 problems company enhancing existing plans necessary cases developing new plans specifically designed mitigate impact operations potential failures year 2000 issue company expects complete test appropriate contingency plans end third quarter 1999 plans designed protect companys assets continue safe operations protect environment enable resumption interrupted operations timely efficient manner companys contingency plans focused thirdparty relationships necessary internal mission critical items remediated otherwise addressed expected end third quarter 1999 internal missioncritical items remediated fully tested prior 2000 company utilizes internal external resources year 2000 efforts total estimated cost achieve year 2000 compliance approximately 250 million mostly expensetype items incremental companys operations approximately 75 million spent december 31 1998 remaining expenditures incurred 1999 rate expenditure expected increase significantly 1999 foregoing amounts include companys share expenditures major affiliates part securities exchange commissions reporting requirements year 2000 problem companies must include description reasonably likely worstcase scenarios potential year 2000 issues chevron business diversity expected reduce risk widespread disruptions worldwide operations year 2000related incidents company expect unusual risks public safety environment arise potential year 2000related failures fs4 company believes impact individual year 2000 failure likely localized limited specific facilities operations yet able fully assess likelihood significant business interruptions occurring one operations around world interruptions could delay company able manufacture deliver refined products chemicals products customers company could also face interruptions ability produce crude oil natural gas expected failures address multiple critical year 2000 issues including failures implement contingency plans timely manner could materially adversely affect companys results operations liquidity one period company currently unable predict aggregate financial consequences potential interruptions foregoing disclosure based chevrons current expectations estimates projections could ultimately prove inaccurate uncertainties actual effects year 2000 issues chevron may different companys current assessment factors many outside control company could affect chevrons ability year 2000 compliant end 1999 include failure customers suppliers governmental entities others achieve compliance inability failure identify critical year 2000 issues develop appropriate contingency plans year 2000 issues ultimately may arise foregoing disclosure made pursuant federal year 2000 information readiness disclosure act environmental matters virtually aspects companys businesses subject various federal state local environmental health safety laws regulations regulatory requirements continue change increase number complexity govern manner company conducts operations also products sells costs complying myriad laws regulations pertaining operations products embedded normal costs conducting business using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1998 974 million consolidated companies included expenditures 275 million environmental capital expenditures 699 million costs associated control abatement hazardous substances pollutants ongoing operations total spent includes spending charged reserves established prior years environmental cleanup programs noncash provisions increase reserves establish new ones year 1999 total worldwide environmental capital expenditures estimated 264 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities well thirdparty waste disposal sites used company accidental leaks spills requiring cleanup may occur ordinary course business addition obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative andor remedial work meet current standards company retained certain environmental cleanup obligations sold port arthur texas refinery 1995 anticipated costs accrued time sale previously recorded reserves remain adequate provisions superfund law environmental protection agency epa designated chevron potentially responsible party otherwise involved remediation 289 hazardous waste sites company made provisions payments 1998 prior years approximately 195 sites single site expected result material liability company time remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposures superfund law provides joint several liability future actions epa regulatory agencies require chevron assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity 1998 company recorded 73 million net beforetax provisions 46 million tax environmental remediation efforts including superfund sites actual expenditures charged provisions previously established reserves amounted 234 million 1998 yearend 1998 companys environmental remediation reserves 826 million including 48 million related superfund sites likely company continue incur additional charges beyond reserved environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amounts future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemicals concerns addition reserves environmental remediation discussed previously company maintains reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives many costs environmentally related provisions recognized unitofproduction basis properties produced amount reserves yearend 1998 14 billion included accumulated depreciation depletion amortization companys consolidated balance sheet fs5 companys ongoing operating assets refineries provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made 1998 company received proceeds reflected operating expenses settlements various insurers related environmental costrecovery claims part settlements chevron released rights assert claims certain policies including rights assert claims future policies previously issued additional proceeds may received future periods settlements insurers amounts expected material companys results operations liquidity contingencies company defendant lawsuit oxy usa brought capacity successor interest cities service company lawsuit claims damages resulting allegedly improper termination tender offer made gulf oil corporation acquired chevron 1984 purchase cities service 1982 1996 trial resulted judgment company 742 million including interest continues accrue 955 percent per year matter pending oklahoma supreme court affirmed lower courts decision march 1999 accordingly company recorded 1998 results litigation reserve 637 million substantially pertained lawsuit ultimate outcome matter cannot determined presently certainty company seek review case appropriate courts chevron five oil companies contesting far unsuccessfully validity patent granted unocal corporation reformulated gasoline chevron sells california certain months year chevron believes unocals patent invalid unfavorable rulings reversed upon appeal unocal continues file additional patents alternate formulations unocals patents upheld chevrons ultimate exposure respect reformulated gasoline sales would depend availability costs alternate formulations industrys ability recover additional costs production prices charged customers june 1997 caltex corporation received claim us internal revenue service irs 292 million excise taxes 140 million penalties 16 billion interest caltex believes underlying excise tax claim wrong therefore claim penalties interest wrong irs claim relates crude oil sales japanese customers beginning 1980 caltex challenging claim fully expects prevail early 1998 caltex provided initial letter credit 233 billion irs pursue claim letter credit renewed february 1999 252 billion caltexs owners chevron texaco guaranteed letter credit company subject various lawsuits claims contingent liabilities including along oil companies actions challenging oil gas royalty severance tax payments based posted prices others related use chemical mtbe certain oxygenated gasolines lawsuits contingent liabilities discussed notes accompanying consolidated financial statements company believes resolution matters materially affect financial position liquidity although costs associated resolution could material respect earnings given period company utilizes various derivative instruments manage exposure price risk stemming integrated petroleum activities instruments commonly used oil gas trading activities relatively straightforward involve little complexity shortterm duration activity instruments intended hedge physical transaction hence gains losses arising instruments offset recognized concurrently gains losses underlying transactions company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps control systems designed monitor manage financial exposures accordance company policies procedures results operations financial position certain equity affiliates may affected business activities involving use derivative instruments companys operations affected changing economic regulatory political environments various countries operates political uncertainty civil unrest may times threaten safety employees companys continued presence country factors carefully considered evaluating level current future activity countries chevron affiliates continue review analyze operations may close sell exchange purchase restructure assets achieve operational strategic benefits improve competitiveness profitability activities may result significant losses gains future periods new accounting standards company adopted five new accounting standards 1998 effective january 1 1998 company adopted statement financial accounting standards sfas 130 reporting comprehensive income statement introduces concept comprehensive income includes net income plus changes stockholders equity stockholder transactions certain foreign currency translation effects unrealized market value gainslosses certain debt equity securities minimum pension liability adjustments chevron elected present consolidated statement comprehensive income along disclosure providing details changes components comprehensive income audited financial statements chevron adopted sfas 131 disclosures segments enterprise related information effective yearend 1998 reporting sfas 131 requires operating segments reported externally essentially management uses assess performance allocate resources geographic disclosures required companywide basis companys country domicile material countries meet materiality tests reporting united states however company provide geographic disclosures united states international companys operating fs6 segments include exploration production refining marketing transportation chemicals also effective yearend 1998 reporting company adopted sfas 132 employers disclosures pensions postretirement benefits sfas 132 standardizes disclosure requirements pensions postretirement benefits requires additional information changes benefit obligations fair values plan assets facilitate financial analysis eliminates disclosures adoptions sfas nos 130 131 132 change measurement recognition income expense march 1998 american institute certified public accountants aicpa released new pronouncement accounting certain software costs statement position sop 981 accounting costs computer software developed obtained internal use fourth quarter 1998 chevron adopted new standard effective january 1 1998 companys past practice expense incurred cost internally developed software sop 981 requires costs incurred develop upgrade enhance software internal use capitalized depreciated suitable useful life net effect implementing pronouncement material april 1998 aicpa released sop 985 reporting costs startup activities pronouncement introduced broad definition items expensed incurred startup activities including onetime activities related opening new facility introducing new products services entering new territories initiating new processes commencing new operations previous accounting standards definitive expensevscapitalization treatment costs chevron already materially compliance pronouncement impact companys accounting practices however caltex capitalized types costs 19921996 period refinery construction project thailand chevron accordingly restated 1998 quarterly financial statements 25 million share charge associated caltexs implementation sop 985 fourth quarter 1998 chevron changed method calculating certain canadian deferred income taxes effective january 1 1998 benefit change 32 million resulted restatement first quarter 1998 net income net benefit chevrons restated first quarter 1998 net income cumulative effect adopting sop 985 caltex change chevrons method calculating canadian deferred taxes immaterial june 1998 financial accounting standards board issued sfas 133 accounting derivative instruments hedging activities new standard requires companies record derivatives balance sheet assets liabilities measured fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction company adopt sfas 133 january 1 2000 believe adoption standard material effect results operations financial position november 1998 emerging issues task force eitf released issue 9810 accounting contracts involved energy trading risk management activities consensus requires companies record fair value contracts involved energy trading risk management activities changes fair value contracts recorded period current earnings company adopt eitf 9810 january 1 1999 believe consensus material effect results operations financial position results operations sales operating revenues 299 billion 1998 compared 406 billion 1997 428 billion 1996 1998 revenues fell due primarily lower crude oil natural gas refined products prices lower us natural gas production increased us refined products sales volumes partially mitigated factors companys exit uk refining marketing business fourth quarter 1997 contributed approximately 27 percent decline 1997 revenues declined 1996 levels lower crude oil refined products prices lower us natural gas production partially offset increased refined products sales volumes higher natural gas prices purchased crude oil products costs 31 percent lower 1998 compared 1997 lower prices crude oil natural gas refined products chemicals feedstock companys exit uk refining marketing business lower crude oil refined products chemicals feedstock prices also accounted 11 percent decrease purchased crude oil products costs 1997 compared 1996 income totaled 386 million 1998 679 million 1997 344 million 1996 changes net gains disposition assets changes interest income caused fluctuations years operating selling general administrative expenses 6251 million excluding effects special items primarily reserves litigation declined 6549 million 1997 6947 million 1996 approximately 200 million 1998 decline resulted companys exit uk downstream business depreciation depletion amortization expense increased 2320 million 2300 million 1997 2216 million 1996 1998 1997 100 million depreciation expense related asset impairments 1996 included minor amount impairments taxes income 495 million 1998 2246 million 1997 2133 million 1996 reflecting effective income tax rates 27 percent 41 percent 45 per fs7 cent respectively lower tax rate 1998 compared 1997 reflects favorable priorperiod tax adjustments favorable adjustments associated finalization income tax returns year 1997 taxrelated credits connected utilization capital loss benefits lower effective tax rates west africa resulting credits associated crude oil reserve additions shift international earnings mix lowertaxrate countries tax expense reductions associated provisions litigation effects offset partially decrease proportion companys share equity affiliates aftertax earnings included companys beforetax income lower tax rate 1997 compared 1996 primarily reflects shift international earnings mix lowertaxrate countries shifts foreign earnings us earnings foreign currency effects decreased net income 47 million 1998 increased net income 246 million 1997 decreased net income 26 million 1996 amounts include companys share affiliates currency transactions significant losses 1998 incurred caltexs operations korea thailand japan foreign currency gains 1997 occurred primarily australia asian operating areas caltex currencies generally weakened us dollar largest currency impact 1997 korea result local net deferred tax benefits local currency losses us dollardenominated liabilities loss currency transactions 1996 resulted fluctuations value uk australian currencies relative us dollar effective october 1 1997 caltexs management changed functional currency korean japanese equity affiliates local currencies us dollar based significantly changed economic facts circumstances local currency functional currency caltexs total reported foreign currency losses korean japanese affiliates 62 million first nine months 1997 change functional currency us dollar caltex reported foreign currency gains 167 million full year 1997 operations korea japan 1998 caltexs foreign currency losses korea japan 145 million us exploration production earnings 1998 excluding special items declined 60 percent 1997 earnings 66 percent 1996 levels due primarily lower crude oil natural gas sales realizations lower production partially offsetting factors 1998 lower operating exploration expenses benefits property sales earnings decline 12 percent 1997 relative 1996s record earnings result lower crude oil prices lower natural gas production higher exploration expenses companys average 1998 us crude oil realization 1142 per barrel 626 lower 1768 average 1997 738 lower 1996 average chevrons crude oil realizations increased steadily 1996 early 1997 began decline continued early 1999 average 1998 us natural gas prices 202 per thousand cubic feet mcf 40 cents lower 242 averaged 1997 26 cents lower 1996 average price warmer weather abundant supplies depressed prices 1998 net liquids production 1998 averaged 325000 bpd 5 percent 343000 bpd 1997 341000 bpd 1996 net natural gas production 1998 averaged 1739 billion cubic feet per day 6 percent 1849 billion cubic feet per day 1997 7 percent 1875 billion cubic feet per day 1996 lower liquids natural gas production years primarily reflected normal field declines property sales 1998 reduced production due september storms gulf mexico effect net income special items years 1996 1998 shown following table fs8 international exploration production earnings 717 million 1998 excluding special items declined 40 percent 1197 million earned 1997 fell 37 percent 1142 million 1996 earnings declined 1998 despite increased production result depressed crude oil prices lower natural gas sales realizations earnings increase 1997 relative 1996 primarily due higher volumes earnings 1998 excluding special items also benefited net favorable tax adjustments prior year earnings year 1998 included net foreign currency gains 29 million compared gains 77 million year 1997 losses 27 million 1996 1998 gains reflect primarily currency rate fluctuations us dollar relative canadian australian currencies 1997 1996 swings related australian dollar british pound effect net income special items years 1996 1998 shown following table international exploration production chevrons average liquids realizations including equity affiliates 1177 per barrel 1998 compared 1797 per barrel 1997 1948 1996 average natural gas realizations fell 194 per thousand cubic feet 1998 compared 210 1997 186 1996 year 1998 net liquids production including production equity affiliates increased 7 percent 782000 bpd operations kazakhstan offshore eastern canada indonesia angola congo principal sources increases net natural gas production increased 14 percent year 654 million cubic feet per day 1998 net natural gas production increased year united kingdom due august 1998 startup production britannia field well indonesia nigeria partially offsetting increases decline natural gas production western canada ninth consecutive year international net production proved reserves increased reflecting companys success expanding international upstream operations 1998 company estimated replaced 165 percent international oil gas production increases proved reserves excluding sales acquisitions production increases expected 1999 new developments come stream west africa production increases tengiz field kazakhstan 1997 net liquids production increased 4 percent 1996 levels 731000 bpd production growth nigeria congo kazakhstan accounted increase net natural gas production declined 1 percent 1997 576 million cubic feet per day compared 1996 due mainly lower rates canada kazakhstan united kingdom indonesia us refining marketing transportation earnings 1998 excluding special items decreased slightly 633 million strong year 1997 declines refined product margins hurricane georges adverse effects earnings offset mostly decreases operating expenses increases refined products sales volumes also included 1998 results benefits income included partial payment business interruption insurance proceeds losses associated hurricane georges prioryear tax adjustments earnings 1997 doubled 662 million compared 290 million 1996 1997 increase driven higher demand refined products improved sales margins reflecting lower crude oil costs lower operating expenses earnings 1996 depressed competitive conditions allow full recovery crude oil manufacturing costs although refined products sales realizations declined 1998 1997 sales volumes increased 4 percent 1243 million bpd 1998 compared 1193 million bpd 1997 1122 million bpd 1996 increases 1998 reflected higher gasoline sales volumes including branded gasoline sales increased 5 percent 1997 8 percent 1996 1998 average us refined products sales realizations declined 2237 per barrel 2893 per barrel 1997 2994 per barrel 1996 reflecting steep slide crude oil prices effect net income special items years 1996 1998 shown following table us refining marketing transportation international refining marketing transportation earnings include international marine operations equity earnings caltex addition earnings consolidated international refining marketing subsidiaries excluding special items 1998 earnings 123 million 66 percent 367 million earned 1997 also 167 million earned 1996 results included fs9 foreign currency losses 69 million 1998 compared foreign currency gains 169 million 1997 losses 17 million 1996 effect net income special items years 1996 1998 shown following table international refining marketing transportation companys share caltexs losses 36 million 1998 compared earnings 252 million 408 million 1997 1996 respectively chevrons share caltex results 1998 included special charges 14 million lastin firstout lifo inventory adjustments 43 million companys share caltexs costs restructuring management administrative functions associated relocation singapore addition net income included special charge 25 million caltexs adoption effective january 1 1998 new accounting standard sop 985 reporting costs startup activities accordingly company restated 1998 quarterly results excluding special items companys share earnings caltexs activities 46 million 247 million 127 million 1998 1997 1996 respectively included chevrons share caltexs 1998 earnings foreign currency losses 68 million compared foreign currency gains 177 million 1997 losses 24 million 1996 largest swing foreign currency effects years korea operating factors 1998 included inventory valuation losses 40 million stemming fall oil prices partially offsetting caltexs large currency gains 1997 inventory valuation losses associated years decline oil prices higher provisions uncollectible receivables asia chevrons international refined products sales volumes declined 1998 785000 barrels per day 886000 barrels per day 1997 944000 barrels per day 1996 fourth quarter 1997 company withdrew refining marketing business united kingdom excluding 1997 sales volumes discontinued business refined products sales volumes 1998 essentially flat compared 1997 declines international trading canadian refined products sales volumes offset increases caltexs operations primary reason decline 1997 volumes compared 1996 caltexs sale interest two japanese refineries early 1996 chemicals earnings excluding special items 151 million 1998 33 percent 224 million 1997 228 million 1996 earnings continued decline response industry overcapacity lower demand resulting asian economic crisis sales volumes remained strong increasing 10 percent 1998 however product sales prices fell faster feedstock fuel costs resulting lower margins companys major chemicals products earnings 1998 benefited prioryear tax adjustments partially offset lower earnings equity affiliates following fourth quarter 1997 sale investment earnings 1998 1997 benefited reduced depreciation expense resulting reassessment useful lives certain assets lower industry prices higher operating expenses related maintenance expansion activities 1997 offset depreciation benefit earnings 1996 reflected receipt insurance proceeds cyclical downturn chemicals industry began second half 1995 caused earnings fall throughout threeyear period effect net income special items years 1996 1998 shown following table chemicals activities include coal operations interest expense interest income cash marketable securities real estate insurance activities corporate center costs net operating charges excluding special items 60 million 1998 compared charges 242 million 1997 285 million 1996 effect net income special items years 1996 1998 shown following table special items include litigation reserves prioryear tax adjustments resulting settlement tax audit issues revaluation company tax liabilities result new developments proceeds insurance settlements related environmental cost recovery claims earnings excluding special items companys coal operations 77 million 1998 41 million 1997 47 million 1996 sales volumes improved companys mines 1998 addition 1998 results fs10 included favorable adjustments 20 million related primarily depreciation expense reserves certain claims company reached agreement february 1999 sell 33 percent interest black beauty coal company gain expected companys remaining coal assets net book value 340 million held sale revenues coal operations 400 million 1998 included 1998 earnings excluding special items balance segment net incremental benefits totaling approximately 80 million consisting primarily taxrelated credits connected utilization capital loss benefits receipt proceeds favorable insurance settlements 1998 also included favorable taxrelated adjustments 1997 partially offsetting items higher interest expenses increased debt levels lower interest income 1997 net charges lower 1996 due primarily lower interest expense reduced debt levels combined higher interest income lower insurance costs liquidity capital resources cash equivalents marketable securities totaled 1413 billion yearend 1998 15 percent 1670 billion yearend 1997 cash provided operating activities 1998 3731 billion compared 4880 billion 1997 5947 billion 1996 severely affecting cash flow 1998 low crude oil price environment resulting impact companys earnings cash distributions equity affiliates working capital requirements 1998 cash provided operating activities sufficient fund investing activities shortfall cash required fund companys dividend payments stockholders resulted increase borrowings 1998 1997 1996 cash provided operating activities sufficient fund companys investing activities dividend payments reduce debt balances january 1999 company declared quarterly dividend 61 cents share common stock annual rate 244 share companys total debt capital lease obligations 7558 billion december 31 1998 increase 25 percent 6068 billion yearend 1997 significant debt transactions 1998 net additions 1528 billion shortterm debt primarily commercial paper newly issued longterm variablerate obligations 224 million partially offsetting increases longterm debt repayments 356 million scheduled 60 million noncash retirement 811 percent esop debt january 1998 december 31 1998 chevron 4050 billion committed credit facilities various major banks 2725 billion termination dates beyond one year facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 1998 addition chevron one subsidiaries existing shelf registrations file securities exchange commission together would permit registered offerings 13 billion debt securities companys shortterm debt consisting primarily commercial paper current portion longterm debt totaled 5890 billion december 31 1998 total shortterm debt 2725 billion reclassified longterm debt yearend 1998 settlement obligations expected require use working capital 1999 company intent ability evidenced committed credit arrangements refinance longterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate companys future debt level dependent primarily capital spending program results operations eventual outcome cities service lawsuit company currently expects debt level increase 1999 believes substantial borrowing capacity meet unanticipated cash requirements companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1 standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service moodys counterparty rating chevron also aa2 ratings denote highquality investmentgrade securities december 1997 chevrons board directors approved repurchase 2 billion outstanding common stock use employee stock option programs 1998 company purchased 52 million shares stock cost 392 million repurchase program bringing total repurchased 64 million shares total cost 484 million financial ratios current ratio current assets current liabilities yearend two items negatively affected chevrons current ratio companys opinion affect liquidity current assets years included inventories valued lifo basis yearend 1998 lower current costs 584 million also company continually refinances commercial paper yearend 1998 approximately 2150 billion commercial paper excluding 2725 billion reclassified longterm debt classified current liability although likely remain outstanding indefinitely company benefits lower interest rates available shortterm debt however chevrons proportionately large amount shortterm debt keeps ratio current assets current liabilities relatively low level 1997 company increased committed credit arrangements permitted reclassification additional 925 million shortterm debt longterm debt provided improvement companys current ratio financial ratios interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrons interest coverage ratio declined 1998 due higher interest expense lower beforetax income fs11 companys debt ratio total debt total debt plus equity increased 1998 result increase total debt capital exploratory expenditures worldwide capital exploratory expenditures 1998 totaled 5314 billion including companys equity share affiliates expenditures capital exploratory expenditures 5541 billion 1997 4840 billion 1996 expenditures exploration production accounted 61 percent total outlays 1998 compared 65 percent 1997 62 percent 1996 international exploration production spending 60 percent worldwide exploration production expenditures 1998 compared 54 percent 1997 61 percent 1996 reflecting companys continuing focus international exploration production activities company projects 1999 capital exploratory expenditures 51 billion including chevrons share spending affiliates 4 percent 1998 spending levels 1999 program provides 37 billion exploration production investments 70 percent international projects major areas emphasis exploration production kazakhstan west africa deep waters gulf mexico successful implementation planned expenditure program 1999 depend upon many factors including ability partners many projects national petroleum companies producing countries fund shares project expenditures refining marketing transportation expenditures estimated 870 million 540 million planned projects united states spent marketing projects international downstream capital program focused asiapacific countries companys caltex affiliate upgrading retail marketing system company plans invest 380 million worldwide chemicals business 50 percent 1998 spending levels capital exploratory expenditures forwardlooking statements annual report contains forwardlooking statements relating chevrons operations based managements current expectations estimates projections petroleum chemicals industries words expects intends plans projects believes estimates similar expressions used identify forwardlooking statements guarantees future performance involve certain risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecast forwardlooking statements among factors could cause actual results differ materially crude oil natural gas prices refining marketing margins chemicals prices competitive conditions affecting supply demand companys aromatics olefins additives products inability companys jointventure partners fund share operations development activities potential failure achieve expected production existing future oil gas development projects potential disruption interruption companys production manufacturing facilities due accidents political events potential disruptions companys operations due untimely incomplete resolution year 2000 issues company entities mutual relationships potential liability remedial actions existing future environmental regulations potential liability resulting pending future litigation addition statements could affected general domestic international economic political conditions fs12 report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements assuring integrity objectivity statements prepared accordance generally accepted accounting principles fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited pricewaterhousecoopers llp independent accountants selected audit committee approved stockholders management made available pricewaterhousecoopers llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management kt derr mr klitten sj crowe kenneth derr martin r klitten stephen j crowe chairman board vice president comptroller chief executive officer chief financial officer march 4 1999 fs13 report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheet related consolidated statements income comprehensive income stockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1998 1997 results operations cash flows three years period ended december 31 1998 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san francisco california march 4 1999 fs14 fs15 fs16 fs17 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies chevron corporation international company subsidiaries affiliates engages fully integrated petroleum operations chemicals operations coal mining united states approximately 90 countries petroleum operations consist exploring developing producing crude oil natural gas transporting crude oil natural gas products pipelines marine vessels motor equipment refining crude oil finished petroleum products marketing crude oil natural gas refined petroleum products chemicals operations include manufacture marketing wide range chemicals industrial uses preparing consolidated financial statements company follows accounting policies accordance generally accepted accounting principles united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature companys operations many countries operates subject changing economic regulatory political conditions also company imports crude oil us refining operations company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method accounting used oil gas exploration production activities derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs cash flows associated derivatives reported underlying hedged transactions cash flows subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income gains losses derivatives contracts qualify hedges recognized currently income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities inventories crude oil petroleum products chemicals stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment costs development wells related plant equipment proved mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed longlived assets including proved oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows impaired assets written fair values proved oil gas properties united states company would typically perform impairment review individual field basis outside united states reviews performed country concession basis impairment amounts recorded incremental depreciation expense period event occurred depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized environmental expenditures environmental expenditures relate current ongoing operations conditions caused past operations expensed expenditures fs18 note 1 summary significant accounting policies continued create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs using currently available technology applying current regulations well companys internal environmental policies future amounts discounted recoveries reimbursements recorded asset receipt reasonably ensured currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions currently included income cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely stock compensation company applies accounting principles board opinion 25 accounting stock issued employeesapb opinion 25 related interpretations accounting stock options presents note 19 pro forma net income earnings per share data accounting prescribed sfas 123 accounting stockbased compensationsfas 123 applied note 2 special items financial information net income affected transactions unrelated necessarily representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net increase decrease net income related tax effects financial information follows excess current cost based average acquisition costs year carrying value inventories lifo method used 584 1089 1122 december 31 1998 1997 1996 respectively note 3 cumulative effect net income accounting changes april 1998 aicpa released statement position 985 reporting costs startup activities sop 985 fs19 note 3 cumulative effect net income accounting changes continued introduced broad definition items expense incurred startup activities including new productsservices entering new territories initiating new processes commencing new operations chevron substantially compliance pronouncement impact companys accounting practices however caltex capitalized types costs certain projects chevron accordingly restated 1998 quarterly financial statements 25 share charge associated caltexs fourth quarter 1998 implementation sop 985 effective january 1 1998 fourth quarter 1998 chevron changed method calculating certain canadian deferred income taxes effective january 1 1998 benefit change 32 resulted restatement first quarter 1998 net income net benefit chevrons restated first quarter 1998 net income cumulative effect adopting sop 985 caltex change chevrons method calculating canadian deferred taxes immaterial chevron also adopted new accounting statements positions 1998 material companys results operations consolidated balance sheet note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following noncash transactions 1997 companys venice louisiana natural gas facilities contributed partnership dynegy inc dynegy increase investments advances merger considered noncash transaction resulted primarily contribution properties plant equipment 1996 company merged substantially natural gas liquids natural gas marketing businesses dynegy company received cash note shares dynegy common stock participating preferred stock exchange contribution net assets dynegy cash received included consolidated statement cash flows proceeds asset sales major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented noncash transactions occurred years presented include contribution working capital balances exchange equity interest newly formed entity acquisition longterm debt exchange termination capital lease obligation reissuance treasury shares management employee compensation plans changes assets liabilities stockholders equity resulting accounting companys employee stock ownership plan esop minimum pension liability market value adjustments investments amounts transactions material aggregate relation companys financial position net operating activities 1998 include noncurrent provision cities service litigation note 5 stockholders equity retained earnings december 31 1998 1997 include 2121 2272 respectively companys share undistributed earnings equity affiliates 1998 company declared dividend distribution one right purchase chevron participating preferred stock rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company amount chevron series participating preferred stock holder right entitled receive purchase price payable upon exercise chevron right subject adjustment person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase rights expire november 2008 may redeemed company 1 cent per right prior date rights voting dividend rights become exercisable dilutive effect earnings company five million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1998 made rights exercisable rights associated 1988 dividend distribution expired 1998 note 6 financial derivative instruments offbalancesheet risk company utilizes variety derivative instruments financial commoditybased hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity derivative instruments consist mainly futures contracts traded new york mercantile exchange international petroleum exchange natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated crude oil purchases sales product sales generally forecast occur within 60 90day period natural gas swaps used primarily fs20 note 6 financial derivative instruments continued hedge firmly committed sales terms swap contracts held yearend 1998 average remaining maturity 55 months gains losses derivative instruments offset recognized concurrently gains losses underlying commodities addition company 1998 1997 entered managed programs using swaps options take advantage perceived opportunities favorable price movements natural gas results programs reflected currently income material 1998 1997 company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures primarily anticipated purchase transactions forecast occur within 90 days company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts made either semiannually annually recorded monthly interest debt expense december 31 1998 three outstanding contracts remaining terms eight months seven years concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed various foreign governments wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied companys counterparties derivative instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit principal security obtained support lines credit negotiated contracts financial strength customer considered sufficient fair value fair values derived either quoted market prices available absence present value expected cash flows fair values reflect cash would received paid instruments settled yearend december 31 1998 1997 fair values financial derivative instruments follows longterm debt 1403 1414 estimated fair values 1485 1481 notional principal amounts interest rate swaps totaled 700 1050 approximate fair values totaling 21 16 notional amounts derivative instruments represent assets liabilities company rather basis settlements contract terms company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 1206 1483 balances 362 828 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities two years three years derivatives contract notional values follows crude oil products futures net contract values 33 4 approximating fair values forward exchange contracts contract values 180 47 approximating fair values gas swap contracts based notional gas volumes approximately 67 75 billion cubic feet fair values approximating face values deferred gains losses accrued consolidated balance sheet material note 7 summarized financial data chevron usa inc december 31 1998 chevron usa inc chevron corporations principal operating company consisting primarily companys us integrated petroleum operations excluding domestic pipeline operations effective february 1 1998 majority companys worldwide petrochemicals operations 1998 operations conducted primarily three divisions chevron usa production company chevron products company chevron chemical company llc prior september 1 1996 chevron usa incs natural gas liquids operations conducted warren petroleum company division natural gas marketing operations conducted chevron usa production company beginning september 1 1996 operations carried 28 percent equity ownership dynegy summarized financial information chevron usa inc consolidated subsidiaries presented note 8 summarized financial data chevron transport corporation chevron transport corporation ctc liberian corporation indirect wholly owned subsidiary chevron corporation ctc principal operator chevrons international tanker fleet engaged marine transportation oil refined petroleum products ctcs shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiarys obligations connection certain debt securities ctc deemed issuer accordance securities exchange fs21 note 8 summarized financial data chevron transport corporation continued commissions disclosure requirements summarized financial information ctc consolidated subsidiaries presented information derived financial statements prepared standalone basis conformity generally accepted accounting principles separate ctc financial statements disclosures omitted information material investors debt securities deemed issued ctc restrictions ctcs ability pay dividends make loans advances december 31 1998 decrease net equity due primarily return 110 million paidin capital ctcs parent partial settlement receivable balance note 9 operating segments geographic data chevron manages exploration production refining marketing transportation chemicals businesses separately companys primary country operation united states country domicile remainder companys operations reported international outside united states since activities country meet requirements separate disclosure segment sales operating revenues exploration production segments derived primarily production crude oil natural gas revenues refining marketing transportation segments derived refining marketing petroleum products gasoline jet fuel gas oils kerosene residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products chemicals segment revenues derived manufacture sale petrochemicals plastic resins lube oil fuel additives activities include corporate administrative costs worldwide cash management debt financing activities coal mining operations held sale insurance operations real estate activities reportable operating segment sales operating revenues including internal transfers years 1998 1997 1996 presented following table sales transfer products segments estimated market prices segment revenues presented following table fs22 note 9 operating segments geographic data continued segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed corporation worldwide basis corporate administrative costs assets allocated operating segments instead operating segments billed direct corporate services nonbillable costs remain corporate center expenses depreciation expense deferred income taxes significant noncash items included segment results aftertax segment operating earnings years 1998 1997 1996 presented following table segment income taxes segment income tax expense years 1998 1997 1996 follows segment assets segment assets include intercompany investments intercompany receivables assets consist primarily worldwide cash marketable securities company real estate information systems coal mining assets segment assets yearend 1998 1997 1996 follows investments earnings affiliated companies included segments affiliates operate dynegy inc included us exploration production pt caltex pacific indonesia cpi tengizchevroil tco included international exploration production caltex corporation included international refining marketing transportation companys affiliates material segments assets results operations information equity affiliates including carrying value equity earnings included note 12 additions longlived assets depreciation expense operating segment included note 13 note 10 litigation company defendant numerous lawsuits including along oil companies actions challenging oil gas royalty severance tax payments based posted prices others related use chemical mtbe certain oxygenated gasolines plaintiffs may seek recover large sometimes unspecified amounts matters may remain unresolved several years practical estimate range possible loss companys litigation matters losses could material respect earnings given period however management opinion resolution lawsuits result significant liability company relation consolidated financial position liquidity company defendant lawsuit oxy usa brought capacity successor interest cities service company lawsuit claims damages resulting allegedly improper termination tender offer made fs23 gulf oil corporation acquired chevron 1984 purchase cities service 1982 1996 trial resulted judgment company 742 million including interest continues accrue 955 percent per year matter pending oklahoma supreme court affirmed lower courts decision march 1999 accordingly company recorded 1998 results litigation reserve 637 million substantially pertained lawsuit ultimate outcome matter cannot determined presently certainty company seek review case appropriate courts note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows december 31 1998 future minimum lease payments operating capital leases follows rental expenses incurred operating leases 1998 1997 1996 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time note 12 investments advances chevron owns 50 percent pt caltex pacific indonesia exploration production company operating indonesia caltex corporation subsidiaries affiliates conducts refining marketing activities asia africa middle east australia new zealand american overseas petroleum limited subsidiary manages certain companys operations indonesia companies subsidiaries affiliates collectively called caltex group tengizchevroil tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period april 1997 chevron sold 10 percent interest tco affiliate lukoil russian oil company arco sale reduced chevrons ownership 45 percent company obligation 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity amount included value investment company believed time continues believe payment beyond reasonable doubt given original intent continuing commitment parties realizing full potential venture 40year life chevron owns 28 percent dynegy inc gatherer processor transporter marketer energy products north america united kingdom including natural gas natural gas liquids crude oil electricity market value chevrons shares dynegy common stock december 31 1998 424 based quoted closing market prices equity earnings together investments advances companies accounted using equity method investments accounted cost follows fs24 effective october 1 1997 caltexs management changed functional currency korean japanese equity affiliates local currencies us dollar based significantly changed economic facts circumstances primarily changing regulatory environments countries company received dividends distributions 254 335 828 1998 1997 1996 respectively including 167 207 735 caltex group also 1998 dynegy repaid 155 loan chevron reflected decrease companys investment affiliate companys transactions affiliated companies summarized following table primarily purchase indonesian crude oil cpi sale crude oil products caltex corps refining marketing companies sale natural gas dynegy purchase natural gas natural gas liquids dynegy accounts notes receivable consolidated balance sheet include 156 145 december 31 1998 1997 respectively amounts due affiliated companies accounts payable include 41 57 december 31 1998 1997 respectively amounts due affiliated companies following tables summarize combined financial information caltex group equitymethod companies together chevrons share amounts shown affiliates 100 percent note 13 properties plant equipment expenses maintenance repairs 833 738 626 1998 1997 1996 respectively fs25 note 14 taxes us federal income tax expense reduced 84 93 77 1998 1997 1996 respectively lowincome housing business tax credits 1998 beforetax income including related corporate charges us operations 728 compared 2054 1997 1631 1996 international operations beforetax income 1106 3448 3109 1998 1997 1996 respectively deferred income tax provisions included costs 470 304 204 related properties plant equipment 1998 1997 1996 respectively companys effective income tax rate varied us statutory federal income tax rate following reduction 1998 effective rate prioryear tax adjustments primarily reflects benefit finalization companys 1997 tax return additional reduction effective tax rate 1998 tax credits reflects larger proportion beforetax income 1998 1997 1996 similar amounts tax credits effects 1998 effective tax rate consist primarily utilization additional capital loss benefits settlement outstanding issues permanent differences company records deferred taxes tax jurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1998 1997 deferred taxes classified consolidated balance sheet follows reported deferred tax balances composed following deferred tax liabilities assets fs26 note 14 taxes continued companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 4558 december 31 1998 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 186 would payable upon remittance earnings note 15 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company entered interest rate swaps portion shortterm debt december 31 1998 1997 company swapped notional amounts 700 1050 floating rate debt fixed rates effect swaps companys interest expense material note 16longterm debt chevron one wholly owned subsidiaries shelf registrations file securities exchange commission together would permit issuance 1300 debt securities pursuant rule 415 securities act 1933 yearend 1998 company 4050 committed credit facilities banks worldwide 2725 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings agreements based either london interbank offered rate reserve adjusted domestic certificate deposit rate amounts outstanding credit agreements year yearend december 31 1998 1997 company classified 2725 shortterm debt longterm settlement obligations expected require use working capital 1999 company intent ability refinance debt longterm basis consolidated longterm debt maturing five years december 31 1998 follows 1999123 2000229 2001141 2002152 2003164 note 17 comprehensive income components changes comprehensive income related tax effects including companys share equity affiliates shown note 18 employee benefit plans pension plans company defined benefit pension plans employees provides certain health care life insurance plans active qualifying retired employees companys policy fund minimum necessary satisfy requirements employee retirement income fs27 note 18 employee benefit plans continued security act companys pension plans companys annual contributions medical dental benefits limited lesser actual medical claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonfunded pension postretirement benefits paid directly incurred accordingly payments reflected changes plan assets table status companys pension plans postretirement benefit plans 1998 1997 follows measurement purposes separate health care costtrend rates utilized preage 65 postage 65 retirees 1999 annual rates change assumed 46 percent 108 percent respectively gradually converging average ultimate rate 51 percent 2013 preage 65 postage 65 onepercentagepoint change assumed health care rates would following effects components net periodic benefit cost 1998 1997 1996 settlement gains 1998 1997 1996 related lumpsum payments totaled 11 29 28 respectively curtailment gains immaterial projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 408 364 87 respectively december 31 1998 301 258 6 respectively december 31 1997 profit sharingsavings plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan charges expense profit sharing part profit sharingsavings plan 60 79 92 1998 1997 1996 respectively commencing october 1997 companys savings plus plan contributions funded leveraged esop shares employee stock ownership plan esop december 1989 company established leveraged esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock esop provides partial prefunding companys future commitments profit sharing part plan result annual income tax savings company esop expected satisfy companys obligations profit sharing part plan next six years permitted aicpa statement position 936 employers accounting employee stock ownership plans company elected continue practices fs28 note 18 employee benefit plans continued based statement position 763 accounting practices certain employee stock ownership plans subsequent consensus emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations company recorded expense esop 58 53 61 1998 1997 1996 respectively including 56 61 65 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 57 53 1998 1997 1996 respectively company made contributions esop 60 55 62 1998 1997 1996 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated profit sharing accounts plan participants based debt service deemed paid year proportion total current year remaining debt service charge credit compensation expense 2 8 4 1998 1997 1996 respectively esop shares december 31 1998 1997 follows management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units beginning awards deferred 1996 stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants charges expense combined management incentive plans excluding expense related ltip stock options discussed note 19 stock options 28 55 36 1998 1997 1996 respectively chevron success sharing company program provides eligible employees annual cash bonus company achieves certain financial safety goals total maximum payout program 8 percent employees annual salary charges program 51 116 72 1998 1997 1996 respectively note 19 stock options company applies apb opinion 25 related interpretations accounting stock options awarded broadbased employee stock option programs longterm incentive plan described compensation cost companys stock options determined based fair market value grant dates awards consistent methodology prescribed sfas 123 companys net income earnings per share 1998 1997 1996 would pro forma amounts indicated effects applying sfas 123 pro forma disclosure indicative future amounts sfas 123 apply awards granted prior 1995 addition certain options vest several years awards future years whose terms conditions may vary anticipated longterm incentive plan stock options granted ltip generally awarded market price date grant exercisable earlier one year later 10 years date grant however portion ltip options granted 1996 terms similar broadbased employee stock options described maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year summary status stock options awarded companys ltip excluding awards granted terms similar broadbased employee stock options 1998 1997 1996 presented fs29 note 19 stock options continued weightedaverage fair market value options granted 1998 1997 1996 2110 1764 1418 per share respectively fair market value option date grant estimated using blackscholes optionpricing model following assumptions 1998 1997 1996 respectively riskfree interest rate 45 61 64 percent dividend yield 31 28 33 percent volatility 286 152 161 percent expected life seven years december 31 1998 9234463 shares option exercise prices ranging 319375 848750 per share following table summarizes information stock options outstanding ltip excluding awards granted terms similar broadbased employee stock options december 31 1998 broadbased employee stock options 1996 company granted eligible employees option 150 shares stock equivalents exercise price 51875 per share addition portion awards granted ltip terms similar broadbased employee stock options issued february 1996 vesting contingent upon one two conditions met december 31 1998 price chevron stock closed 7500 per share three consecutive business days alternatively company highest annual total stockholder return competitor group years 1994 1998 options vested june 1997 share price performance condition met options 7204800 shares including similartermed ltip awards granted 1996 forfeitures options 302500 shares reduced outstanding option shares 6902300 december 31 1996 1997 exercises 4171300 forfeitures 517550 reduced outstanding option shares 2213450 yearend 1997 1998 exercises 1361000 forfeitures 10800 reduced outstanding option shares 841650 yearend 1998 unexercised options expire march 31 1999 apb opinion 25 company recorded expenses 125 29 options 1997 1996 respectively fair market value option share date grant sfas 123 estimated 566 using binomial optionpricing model following assumptions riskfree interest rate 51 percent dividend yield 42 percent expected life three years volatility 209 percent 1998 company announced new broadbased employee stock option program granted eligible employees option varied 100 300 shares stock equivalents dependent employees salary job grade options vest two years company highest total stockholder return among competitor group years 1994 1998 one year since stockholders return performance condition met options vest february 2000 options 4820800 shares awarded exercise price 763125 per share forfeitures options 270650 shares reduced outstanding option shares 4550150 december 31 1998 date none exercisable options expire february 11 2008 apb opinion 25 company recorded expense 2 options 1998 fair value option share date grant sfas 123 estimated 1908 using average results blackscholes models preceding 10 years 10year averages assumption used blacksholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent note 20 earnings per share eps basic eps includes effects award salary deferrals invested chevron stock units certain officers employees company diluted eps includes effects deferrals well dilutive effects outstanding stock options awarded ltip broadbased employee stock option program see note 19 stock options following table sets forth computation basic diluted eps fs30 note 21 contingencies commitments us federal income tax california franchise tax liabilities company settled 1987 1991 respectively june 1997 caltex corporation received claim us internal revenue service irs 292 million excise taxes 140 million penalties 16 billion interest caltex believes underlying excise tax claim wrong therefore claim penalties interest wrong irs claim relates crude oil sales japanese customers beginning 1980 caltex challenging claim fully expects prevail early 1998 caltex provided initial letter credit 233 billion irs pursue claim letter credit renewed february 1999 252 billion caltexs owners chevron texaco guaranteed letter credit settlement open tax years expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination december 31 1998 company subsidiaries direct indirect guarantors contingent liabilities 79 notes affiliated companies 106 notes others company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers financing arrangements aggregate amounts required payments various commitments 1999314 2000280 2001248 2002231 2003185 2004 after546 total payments agreements 201 1998 243 1997 177 1996 company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemical concerns results operations financial position certain equity affiliates may affected business activities involving use derivative instruments companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys operations related results carefully considered management evaluating level current future activity countries areas company significant operations include united states canada australia united kingdom norway congo angola nigeria democratic republic congo papua new guinea china indonesia venezuela companys caltex affiliates significant operations indonesia korea japan australia thailand philippines singapore south africa companys tengizchevroil affiliate operates kazakhstan fs31 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities sfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables iii provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola congo democratic republic congo geographic category includes activities australia united kingdom north sea canada papua new guinea venezuela china countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia 45 percent 50 percent prior april 1997 equity share tengizchevroil tco exploration production partnership operating republic kazakhstan table costs incurred exploration property acquisitions development1 fs32 table ii capitalized costs related oil gas producing activities table iii results operations oil gas producing activities 1 companys results operations oil gas producing activities years 1998 1997 1996 shown following table net income exploration production activities reported page fs9 reflects income taxes computed effective rate basis accordance sfas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs 9 fs33 table iii results operations oil gas producing activities1 cont inued fs34 table iii results operations oil gas producing activities 12 continued table iv reserve quantities information companys estimated net proved underground oil gas reserves changes thereto years 1998 1997 1996 shown following table proved reserves estimated companys asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually corporations reserves advisory committee ensure rigorous professional standards reserves definitions prescribed securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves include additional quantities recoverable beyond term lease contract unless renewal reasonably certain may result extensions currently proved areas application secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate april 1997 chevron sold 10 percent interest tengizchevroil reducing ownership 45 percent june 1997 chevron assumed operatorship risked service agreement venezuelas block ll652 located northeast section lake maracaibo chevron accounting ll652 oil gas activity december 31 1998 recorded 55 million barrels proved crude oil reserves reserve quantities recorded companys service agreement venezuela began 1996 involving boscan field fs35 table iv reserve quantities information continued table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs36 table v standardized measure discounted future net cash flows related proved oil gas reserves continued table vi changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included revisions previous quantity estimates fs37 fiveyear financial summary 1 fs38 caltex group companies combined financial statements december 31 1998 c1 caltex group companies combined financial statements december 31 1998 index page general information c3 c8 independent auditors report c9 combined balance sheet c11 combined statement income c12 combined statement comprehensive income c12 combined statement stockholders equity c13 combined statement cash flows c14 notes combined financial statements c15 c27 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc collectively stockholders created 1936 two owners produce transport refine market crude oil petroleum products group comprised following companies caltex corporation formerly caltex petroleum corporation company incorporated delaware many subsidiaries affiliates conducts refining transporting trading marketing activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas subsidiary provides services manages certain exploration production operations indonesia chevron texaco interests necessarily jointly brief description companys operations items follows caltex corporation caltex subsidiaries affiliates caltex operates approximately 60 countries principally africa asia middle east new zealand australia caltex involved aspects downstream business refining distribution shipping storage marketing supply trading operations yearend 1998 caltex 7900 employees approximately 2 located united states majority refining certain marketing operations conducted joint ventures caltex equity interests 13 refineries equity refining capacity approximately 978000 barrels per day continues improve refineries investments designed provide higher yields meet environmental regulations additionally interests two lubricant refineries six asphalt plants 17 lubricant blending plants 500 ocean terminals depots caltex also interest fleet vessels owns equity interests numerous pipelines sales crude oil petroleum products excess 15 million barrels per day 1998 caltex conducts international crude oil petroleum product logistics trading operations subsidiary singapore also active petrochemical business particularly japan korea marketing caltex affiliates maintain strong marketing presence network 8000 retail outlets 4700 branded caltex also operates 425 star mart convenience stores many anchor highvolume station locations many stations include new ancillary revenue centers quickservice restaurants auto lube bays brushless car washes significant portion 18 billion caltex plans invest next three years targeted stimulate retail growth continue rollout new corporate retail image introduced 1996 focussing preferred marketing areas expenditures provide greatest benefit business underperforming stations poor prospects improvement eliminated 1998 response major changes petroleum business increased competition partly due challenges created currency economic crisis asia pacific region caltex announced change organizational structure geographic one modeled along functional business lines namely marketing refining lubricants trading aviation new business development business support time emphasizing managing costs improving capital investment returns caltex use functional focus build rebuild brand strength increase emphasis convenience retailing maximize emerging business opportunities new structure position caltex seize opportunities provide higher returns strong longterm growth focus mission respond market developments quickly well place better position serve customers partners suppliers effectively functional management structure effective january 1 1999 c3 caltex group companies general information refining margins 1998 lowest level ten years due worldwide oversupply capacity partly result economic disruption many asian economies focusing full utilization assets cost reductions costeffective investment initiatives improve efficiency maintain integrity refining assets operating performance groups refineries continued improve mitigating extent effect low margins 1997 caltexs 64 owned thailand affiliate star petroleum refining company ltd sprc rayong refining company rrc affiliate royal dutch petroleum company entered memorandum understanding combine operations two nearby refineries order achieve significant economic benefits increased efficiency cost reduction 1998 sprc rrc evaluated various proposed structures synergies conducted discussions lenders ensure proper approvals obtained tentative agreement reached form new entity alliance refining company arc owned 32 caltex shell 36 petroleum authority thailand ptt government entity arc operate refineries responsible ongoing maintenance new construction significant economic benefits expected arrangement pending lender thai cabinet approvals binding agreements expected signed operations commenced arc first half 1999 period 19921996 sprc capitalized certain startup costs primarily organizational training related refinery construction costs considered part effort required prepare refinery operations issuance 1998 american institute certified public accountants statement position 985 reporting costs startup activities costs would accounted period expenses group elected early adoption pronouncement effective january 1 1998 accordingly recorded cumulative effect charge income january 1 1998 50 million representing groups share costs corporate effective january 1 1999 caltex eliminated petroleum name become caltex corporation change reflects broader scope activities pursuing particularly rapidly growing star mart convenience stores related services provided customers concurrently caltex announced relocation corporate senior leadership team dallas texas singapore leadership team reside within primary operational area closer customers achieve timely effective process corporate governance relocation completed first half 1999 caltex recorded charge income 86 million 1998 restructuring related reorganization costs including special voluntary involuntary severance benefits see note 13 notes combined financial statements p caltex pacific indonesia cpi holds production sharing contract central sumatra year 2021 cpi also acts operator sumatra eight petroleum contract areas 33 fields jointly held chevron texaco exploration pursued area comprising 183 million acres production established giant minas duri fields along smaller fields gross production fields operated cpi 1998 760000 barrels per day cpi entitlements sold stockholders use systems sell third parties yearend 1998 cpi approximately 5900 employees located indonesia c4 caltex group companies general information american overseas petroleum limited aopl addition providing services cpi aopl subsidiary amoseas indonesia inc manages geothermal power generation projects texacos chevrons interests indonesia yearend aopl approximately 279 employees 6 located united states economic overview outlook second half 1997 many countries pacific rim experienced major devaluations currencies compared us dollar resulting economic slowdowns throughout area 1998 weak economic conditions negatively affected oil consumption although region still experiencing economic contraction currencies strengthened 1998 signs emerging general stabilization economies region indications economic recovery countries group significant operations either subsidiary affiliate many affected countries korea philippines singapore thailand malaysia indonesia material groups net income cash flows capital environmental activities groups activities subject various environmental health safety regulations countries operates regulations vary significantly scope standards enforcement groups policy comply applicable environmental health safety laws regulations well internal policies group active program ensure environmental standards maintained includes closely monitoring applicable statutory regulatory requirements well enforcement policies countries operates conducting periodic environmental compliance audits environmental guidelines definitions promulgated american petroleum institute provide basis reporting groups expenditures year ended december 31 1998 group including equity share affiliates incurred total costs approximately 138 million consisting capital costs 70 million nonremediation related operating expenses 68 million major component groups expenditures prevention air water pollution december 31 1998 group including equity share affiliates accrued 135 million various known remediation activities including 114 million relating future cost restoring abandoning existing oil gas properties group provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized however group believes future environmental expenditures materially affect financial position liquidity year 2000 compliance problem year 2000 problem y2k relates inability computer systems equipment systems embedded microchip technology correctly interpret process datesensitive data certain key dates year 2000 could result systems failures miscalculations could cause business disruptions due widespread nature problem group could affected failures systems also failures systems customers suppliers utilities government entities provide essential services c5 caltex group companies general information state readiness individual operating location including major affiliates y2k teams corporate level team established 1997 early 1998 corporate team monitors supports individual locations also evaluates progress milestones outlined y2k progress reports presented regularly group management stockholders common rigorous process employed identify test remediate systems affected y2k problem achieve y2k readiness process consists following many cases overlapping steps 1 inventory list systems embedded microchip technology may datesensitive components computer hardware software well embedded microchip systems 2 business risk assessment determine importance system business including financial operational environmental safety impact 3 y2k risk assessment determination whether systems system components y2k compliant firstly obtaining vendor compliance statements systems evaluating detailed vendor test results medium risk systems conducting site endtoend tests high risk systems 4 remediation testing remediation testing comprehensive contingency plan preparation highrisk systems group essentially completed inventory business risk assessments major operating areas y2k risk assessments also complete approximately 2530 remediation site endtoend testing highrisk systems performed february 1999 estimated completed june september 1999 includes major internal business support systems various equipment process control etc embedded microchips also includes readiness critical business chain partners third party suppliers customers highrisk systems found y2k noncompliant corrected primarily softwarehardware upgrades andor implementation new systems group expects remediation high risk business systems essentially complete end 1999 however remediation lower risk systems may continue year 2000 beyond determination y2k readiness critical business chain partners proven challenging aspect y2k program system suppliers responsive requests compliance information obtaining responses business chain partners state readiness difficult group representatives meeting business chain partners identified important business determine state readiness critical business chain partners effective programs place additional contingency plans put place necessary end 1999 costs group using dedicated internal external resources y2k initiative total cost address y2k issues estimated approximately 57 million approximately 15 million spent end 1998 figures include work undertaken make compliant older financial accounting systems include costs incurred system implementations modifications primary reasons y2k compliance y2k project costs also include corporate project team external contractors consultants internal costs salaries travel expenses pocket costs operating company teams included total c6 caltex group companies general information contingency plans due uncertain nature y2k problem inflexibleabsolute deadline strong emphasis placed contingency planning preparation generally normal course business group developed contingency plans respond equipment failures emergencies business interruptions however y2k issue increases complexity planning therefore group enhancing existing plans possible developing plans necessary specifically designed mitigate financial impacts potential high risk system y2k related failures allow carry business despite possible failures group expects complete test appropriate contingency plans particular emphasis unremediated remediated untested high risk systems prior year 2000 risks certain risks related y2k problem could material adverse effect groups results operations liquidity financial condition include limited failure identify remediate significant y2k problems failure successfully implement contingency plans timely manner failures customers suppliers utilities government entities provide essential services correct y2k problems dispersion groups downstream operations 60 countries expected mitigate risk potential widespread disruption operations groups upstream operations located indonesia primarily islands sumatra java due isolated self sufficient nature operations potential risk widespread disruption exploration production operations also well mitigated group expect unusual risks public safety environment resulting potential y2k related incidents facilities operations group believes impact y2k related failure systems likely localized limited specific facilities operations interruptions caused failure could delay group able explore produce transport hydrocarbons steam manufacture deliver refined products customers short period group would expect significant impact ability pursue primary business objectives expected worst case scenario involving failure address multiple high risk y2k issues including failures implement contingency plans timely manner could materially affect groups results operations liquidity one period group currently unable predict aggregate financial consequence potential interruptions foregoing disclosure based groups current expectation estimates projections could ultimately prove inaccurate uncertainties actual effects y2k issues group may different current assessment supplemental market risk disclosures group uses derivative financial instruments hedging purposes instruments principally include interest rate andor currency swap contracts forward option contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales positions adjusted changes exposures hedged since group hedges portion market risk exposures exposure remains unhedged portion notes combined financial statements provide data relating derivatives applicable accounting policies c7 caltex group companies general information debt debtrelated derivatives group exposed interest rate risk shortterm longterm debt variable interest rates approximately 20 billion 19 billion effects related net interest rate swaps 05 billion 04 billion december 31 1998 1997 respectively group seeks balance benefit lower cost variable rate debt inherent increased risk expensive less risky fixed rate debt accomplished adjusting mix fixed variable rate debt well use derivative financial instruments principally interest rate swaps based overall interest rate exposure variable rate debt interest rate swaps december 31 1998 1997 hypothetical change interest rates 2 would change interest expense approximately 30 million year crude oil petroleum product hedging group hedges portion market risks associated crude oil petroleum product purchases sales group uses established petroleum futures exchanges well overthecounter hedge instruments including futures options swaps derivative products reduce groups exposure price volatility physical markets sensitivity hypothetical 10 change crude oil petroleum product prices would result material loss outstanding derivatives end 1998 1997 terms groups financial position results operations liquidity currencyrelated derivatives group exposed foreign currency exchange risk countries operates hedge adverse changes foreign currency exchange rates us dollar group sometimes enters forward exchange options contracts depending exposure hedged group either purchases sells selected foreign currencies group net foreign currency purchase contracts approximately 370 million december 31 1998 417 million december 31 1997 hedge certain specific transactions net exposures including foreign currency denominated debt hypothetical 10 change exchange rates us dollar would result net material change groups operating results cash flows derivatives related underlying hedged positions 1998 1997 hedging activities new accounting standards statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities issued financial accounting standards board 1998 effective group beginning january 1 2000 sfas 133 requires companies record derivatives balance sheet assets liabilities measured fair value changes fair value derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type exposure hedged group believes adoption standard material effect results operations financial position emerging issues task force eitf 9810 accounting energy trading risk management activities effective 1999 covers contracts related purchase sale energy commodities prior effective date sfas 133 eitf consensus requires energy contracts related trading activities marked market gains losses included currently net income group believes adoption eitf consensus material effect results operations financial condition c8 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1998 1997 related combined statements income comprehensive income stockholders equity cash flows years threeyear period ended december 31 1998 combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1998 1997 results operations cash flows years threeyear period ended december 31 1998 conformity generally accepted accounting principles discussed note 12 combined financial statements group changed method accounting startup costs 1998 comply provisions aicpas statement position 985 reporting costs startup activities skpmg llp kpmg llp dallas texas february 8 1999 c9 c10 c11 c12 c13 c14 caltex group companies notes combined financial statements note 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex corporation subsidiaries american overseas petroleum limited subsidiary ptcaltex pacific indonesia intercompany transactions balances eliminated subsidiaries include companies owned directly indirectly 50 except cases control rest group groups accounting policies accordance us generally accepted accounting principles translation foreign currencies us dollar functional currency principal subsidiary affiliate operations effective october 1 1997 group changed functional currency affiliates japan korea local currency us dollar change functional currency applied prospective basis estimates preparation financial statements conformity generally accepted accounting principles requires estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results may differ estimates shortterm investments highly liquid investments classified available sale maturity three months less purchased considered cash equivalents longer maturities classified marketable securities inventories valued lower cost current market except noted crude oil petroleum product inventories stated cost primarily determined using lastin firstout lifo method costs include applicable acquisition refining costs duties import taxes freight etc materials supplies stated average cost certain trading related inventory highly transitory nature markedtomarket investments advances investments affiliates group ownership interest 20 50 majorityowned investments control rest group accounted equity method groups share earnings losses companies included current results recorded investments reflect underlying equity company investments affiliates carried cost dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing properties including intangible development costs determined using unitofproduction method assets depreciated class straightline basis using rates based upon estimated useful life class maintenance repairs necessary maintain facilities operating condition charged income incurred additions improvements materially extend life assets capitalized upon disposal assets net gain loss included income longlived assets including proved developed oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows impaired assets written fair values impairment amounts recorded incremental depreciation expense period event occurred c15 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued deferred credits deferred credits primarily represent indonesian governments interest specific property plant equipment balances production sharing contract psc indonesian government retains majority equity share current production profits intangible development costs idc capitalized us generally accepted accounting principles successful efforts method treated period expenses psc reporting capitalized amounts depreciated accelerated rate psc reporting deferred credit balances recognize governments share idc reported capital costs life psc included income depreciation depletion amortization applied future production related profits comprehensive income january 1 1998 group adopted sfas 130 reporting comprehensive income sfas 130 established standards reporting presentation comprehensive income components comprehensive income consists net income currency translation adjustments unrealized gainslosses investments presented separate statement sfas 130 requires additional disclosure affect groups financial position results operations derivative financial instruments group uses various derivative financial instruments hedging purposes instruments principally include interest rate andor currency swap contracts forward options contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales prior realized gains losses hedges existing nonmonetary assets included carrying value assets gains losses related qualifying hedges firm commitments anticipated transactions deferred recognized income underlying hedged transaction recognized income derivative instrument ceases hedge related gains losses recognized currently income gains losses derivative contracts qualify hedges recognized currently income accounting contingencies certain conditions may exist date financial statements issued may result loss group resolved one future events occur fail occur assessing contingencies necessarily involves exercise judgment assessing loss contingencies related legal proceedings pending group unasserted claims may result proceedings group evaluates perceived merits legal proceedings unasserted claims well perceived merits amount relief sought expected sought therein assessment contingency indicates probable material liability incurred amount loss estimated liability accrued groups financial statements assessment indicates potentially material liability probable reasonably possible probable cannot estimated nature contingent liability together estimate range possible loss determinable disclosed loss contingencies considered remote generally disclosed unless involve guarantees case nature amount guarantee would disclosed however instances disclosure otherwise required group may disclose contingent liabilities unusual nature judgment management legal counsel may interest stockholders others environmental matters groups environmental policies encompass existing laws country group operates groups internal standards expenditures create future benefits contribute future revenue generation capitalized future remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available undiscounted estimates using data primarily developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realizable c16 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued revenue recognition general revenue recognized crude oil natural gas refined product sales title passes specified sales contract reclassifications certain reclassifications made prior year amounts conform 1998 presentation note 2 asset sale 1997 caltex trading transport corporation subsidiary group sold cash 40 interest bahrain refining joint venture plus related assets net book value approximately 140 million note 3 inventories reported value inventory december 31 1998 approximated current cost december 31 1997 excess current cost reported value inventory maintained lifo basis approximately 28 million certain inventories recorded market lower lifo carrying value adjustments market reduced earnings 18 million 1998 36 million 1997 earnings increased 29 million 1996 due recovery market values previous years writedowns periods presented inventory quantities valued lifo basis reduced certain locations inventory reductions decreased net income 4 million 5 million net related market valuation adjustments 1 million 14 million 1998 1997 respectively increased net income 4 million 1996 trading inventories recorded marktomarket basis due highly transitory nature december 31 1998 value inventories approximately 3 million approximated cost note 4 equity affiliates investments affiliates equity include following carrying value groups investment affiliates excess proportionate share affiliate net equity amortized approximately 20 years effective april 1 1996 group sold 50 investment nippon petroleum refining company limited approximately 2 billion cash groups net income 1996 includes net aftertax gain approximately 620 million related sale combined statement income includes group product sales purchaser approximately 05 billion first quarter 1996 c17 caltex group companies notes combined financial statements note 4 equity affiliates continued december 31 1997 caltex australia limited cal subsidiary group acquired remaining 50 australian petroleum pty limited appl subsidiary pioneer international limited approximately 186 million cash plus issuance additional 90 million shares cal stock result transaction groups equity cal declined 75 50 indirect equity appl increased 50 375 transaction recorded purchase cal classified affiliate individual assets liabilities excluded groups consolidated financial statements remaining interest star petroleum refining company ltd sprc owned thailand governmental entity provisions sprc shareholders agreement limit groups control provide active participation minority shareholder routine business operating decisions agreement also mandates reduction group ownership minority position year 2001 however likely delayed view current economic difficulties region shown summarized combined financial information affiliates equity millions dollars cash dividends received affiliates 50 million 43 million 89 million 1998 1997 1996 respectively summarized combined financial information includes cumulative effect accounting change 1998 described note 12 retained earnings december 31 1998 1997 includes 14 billion represents groups share undistributed earnings affiliates equity note 5 shortterm debt short term debt consists primarily demand promissory notes acceptance credits overdrafts current portion longterm debt weighted average interest rates shortterm financing december 31 1998 1997 73 79 respectively unutilized lines credit available shortterm financing totaled 13 billion december 31 1998 c18 caltex group companies notes combined financial statements note 6 longterm debt longterm debt related interest rates 1998 1997 consist following aggregate maturities longterm debt year follows millions dollars 1999 40 included shortterm debt 2000 115 2001 454 2002 243 2003 82 thereafter 36 note 7 operating leases group operating leases involving various marketing assets net rental expense 103 million 105 million 92 million 1998 1997 1996 respectively future net minimum rental commitments operating leases noncancelable terms excess one year follows millions dollars 1999 64 2000 53 2001 46 2002 31 2003 23 2004 thereafter 37 note 8 employee benefit plans effective january 1 1998 group adopted sfas 132 employers disclosures pension postretirement benefits sfas 132 revises employers disclosures pension postretirement benefit plans change method accounting plans group various retirement plans including defined benefit pension plans covering substantially employees benefit levels vesting terms funding practices vary among plans c19 caltex group companies notes combined financial statements note 8 employee benefit plans continued following provides reconciliation benefit obligations plan assets funded status various plans primarily foreign inclusive affiliates equity c20 caltex group companies notes combined financial statements note 8 employee benefit plans continued postretirement benefits comprised contributory healthcare life insurance plans one percentage point change assumed health care cost trend rate 91 would change postretirement benefit obligation 9 million would material effect aggregate service interest components note 9 commitments contingencies 1997 caltex received claim us internal revenue service irs 292 million excise tax along penalties interest bringing total approximately 2 billion irs claim relates crude oil sales japanese customers beginning 1980 prior time caltex directly supplied crude oil japanese customers however 1980 caltex subsidiary also became contractual supplier crude oil irs position additional supplier constituted transfer property thus taxable caltex challenging claim since addition another supplying company taxable event additionally caltex believes claim based overstated value finally caltex disagrees imposition calculation interest penalties caltex believes underlying excise tax claim wrong caltex also believes related claim penalties wrong irs claim interest flawed litigate claim caltex required maintain letter credit 25 billion february 8 1999 including interest 1998 1999 stockholders guaranteed letter credit excise taxes unlike income taxes taxpayer required pay portion tax liability gain access courts caltex made payment 12 million order progress claim c21 caltex group companies notes combined financial statements note 9 commitments contingencies continued caltex also involved irs tax audits years 19871993 claims irs outstanding years opinion management adequate provision made income taxes years either examination subject future examination caltex certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer various lawsuits filed us philippines behalf least 3350 parties either survivors relatives persons allegedly died collision philippine waters december 20 1987 one vessel involved collision carrying products caltex philippines inc subsidiary caltex connection contract affreightment although caltex direct indirect ownership operational responsibility either vessel various theories liability alleged caltex major suit filed us louisiana state court mention specific monetary recovery although pleadings contain variety demands various categories compensatory well punitive damages consequently reasonable estimate damages involved sought made time caltex sought preclude plaintiffs pursuing louisiana litigation various federal procedural grounds pursued remedies federal court system without success including denial writ certiorari us supreme court caltex management intends continue contest foregoing litigation vigorously various substantive procedural grounds group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third parties groups opinion impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position liquidity results operations reasonable period time caltex subsidiary contractual commitment 2007 purchase petroleum products conjunction financing refinery owned affiliate total future estimated commitments contract based current pricing projected growth rates approximately 800 million per year purchases billions dollars similar contracts 08 10 08 1998 1997 1996 respectively caltex contingently liable sponsor support funding maximum 278 million connection affiliates project finance obligations project operational requirements plant physical completion test completed june 30 1998 fully satisfied thus event default exists terms financing agreement secured lenders agreed enforce rights remedies june 30 1999 since affiliate able satisfy certain conditions loan documentation affiliate currently addressing outstanding issues remedy default conditions expects meet completion conditions agreed date 1998 caltex contributed 218 million additional equity affiliate meet sponsor support requirements sponsor similarly provided proportionate share equity sponsor support agreement addition 1998 caltex sponsor provided temporary shortterm extended trade credit related crude oil supply outstanding balance owing caltex december 31 1998 31 million possible requirement postconstruction support largely dependent refining margins affiliates ability service secured debt c22 caltex group companies notes combined financial statements note 10 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk groups outstanding commitments interest rate swaps foreign currency contractual amounts group enters interest rate swaps managing interest risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities eleven years net unrealized losses gains contracts outstanding december 31 1998 1997 7 million 6 million respectively group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments contracts purchase foreign currencies principally australian hong kong singapore dollars hedging existing liabilities maturities three years net unrealized losses applicable outstanding forward exchange contracts december 31 1998 1997 23 million 16 million respectively group hedges portion market risks associated crude oil petroleum product purchases sales established petroleum futures exchanges used well overthecounter hedge instruments including futures options swaps derivative products reduce groups exposure price volatility physical markets derivative positions markedtomarket valuation purposes gains losses hedges deferred recognized concurrently underlying commodity transactions derivative gains losses considered hedge recognized currently income unrealized gains commoditybased derivative hedging contracts outstanding december 31 1998 1997 14 million 3 million respectively groups longterm debt 930 million 770 million december 31 1998 1997 respectively fair values 896 million 731 million december 31 1998 1997 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents marketable securities notes accounts receivable current liabilities approximate fair value short maturities group investments debt securities availableforsale amortized costs 105 million 82 million december 31 1998 1997 respectively fair value securities december 31 1998 1997 approximates amortized costs december 31 1998 1997 investments debt securities availableforsale maturities less ten years december 31 1998 1997 groups carrying amount investments affiliates accounted equity included 19 million 12 million respectively tax unrealized net gains investments held companies c23 caltex group companies notes combined financial statements note 10 financial instruments continued group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentration risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer considered sufficient credit losses historically within managements expectations note 11 taxes charged income consist following c24 caltex group companies notes combined financial statements note 11 taxes continued income taxes computed individual company basis rates effect various countries operation effective tax rate differs expected tax rate us federal corporate tax rate follows increase effective tax rate 1998 primarily due larger proportion earnings higher tax rate foreign jurisdictions effect foreign currency translation pretax income deferred income taxes provided tax jurisdiction temporary differences financial reporting tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax liabilities assets follows valuation allowance established reduce deferred income tax assets amounts groups judgement likely 50 utilized current future taxable income temporary differences become deductible c25 caltex group companies notes combined financial statements note 11 taxes continued undistributed earnings subsidiaries affiliates us deferred income tax provision made approximated 34 billion december 31 1998 december 31 1997 respectively earnings intended indefinitely reinvested become taxable us upon remittance dividends practical estimate amount tax may payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability excess us foreign income tax credits recorded realized note 12 accounting change affiliate group capitalized certain startup costs primarily organizational training period 19921996 related grassroots refinery construction project thailand costs considered part effort required prepare refinery operations issuance aicpas statement position 985 reporting costs startup activities costs would accounted period expenses group elected early adoption pronouncement effective january 1 1998 accordingly recorded cumulative effect charge income january 1 1998 50 million representing groups share applicable startup costs excluding cumulative effect change accounting startup costs materially affect net income 1998 note 13 restructuringreorganization caltex recorded charge income 86 million 1998 various restructuring reorganization activities undertaken realign company along functional lines reduce redundant operating activities charge includes severance termination benefits total 500 employees 52 million us headquarter expatriate operating staff 26 million severance termination benefits 26 million employee benefit curtailmentsettlements 8 million various foreign staff 10 million asset lease commitment writeoffs reorganization costs 16 million approximately 53 million remained recorded liabilities december 31 1998 mostly paid 1999 charges included selling general administrative expenses combined statement income note 14 combined statement cash flows changes operating working capital consist following net cash provided operating activities includes following cash payments interest income taxes c26 caltex group companies notes combined financial statements note 14 combined statement cash flows continued deconsolidation caltex australia limited december 31 1997 described note 4 resulted noncash reduction following combined balance sheet captions 1997 included combined statement cash flows net working capital 60 equity affiliates 94 longterm debt 45 minority interest 109 significant noncash investing financing transactions occurred 1998 1996 net cash provided operating activities 1996 includes income tax payments relating sale investment affiliate proceeds sale included net cash provided investing activities note 15 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures affiliates equity accordingly disclosures presented herein c27item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs12 consolidated statement income three years ended december 31 1999 fs13 consolidated statement comprehensive income three years ended december 31 1999 fs13 consolidated balance sheet december 31 1999 1998 fs14 consolidated statement cash flows three years ended december 31 1999 fs15 consolidated statement stockholders equity three years ended december 31 1999 fs16 notes consolidated financial statements fs17 fs31 2 financial statement schedules caltex group companies combined financial statements c1 c24 combined financial statements caltex group companies filed part report schedules omitted applicable required information included combined financial statements notes thereto 3 exhibits exhibit index pages 26 27 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k dated november 18 1999 filed company november 18 1999 report chevron announced reached agreement occidental petroleum settle cities service litigation 2 current report form 8k dated january 18 2000 filed company january 18 2000 report chevron filed restated financial statements three sixmonth periods ended june 30 1999 three nine month periods ended september 30 1999 statements restated recognize initial ownership certain marketable equity securities subsequent unrealized gains securities 3 current report form 8k dated march 6 2000 filed company march 6 2000 report chevron filed companys 1999 audited financial statements 4 amended current report form 8k dated march 7 2000 filed company march 7 2000 amended report chevron refiled companys 1999 audited financial statements previously filed current report form 8k dated march 6 2000 filed march 6 2000 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day march 2000 chevron corporation david j oreilly david j oreilly chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 29th day march 2000 principal executive officers directors david j oreilly samuel h armacost david j oreilly chairman board samuel h armacost richard h matzke sam ginn richard h matzke vicechairman board sam ginn james n sullivan carla hills james n sullivan vicechairman board carla hills j bennett johnston j bennett johnston charles pigott principal financial officer charles pigott martin r klitten condoleezza rice martin r klitten vicepresident condoleezza rice chief financial officer frank shrontz principal accounting officer frank shrontz stephen j crowe changlin tien stephen j crowe comptroller changlin tien john young john young lydia beebe lydia beebe attorneyinfact exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated november 23 1998 filed exhibit 31 chevron corporations annual report form 10k 1998 dated march 31 1999 incorporated reference herein 32 bylaws chevron corporation amended november 23 1998 filed exhibit 32 chevron corporations annual report form 10k 1998 dated march 31 1999 incorporated reference herein 41 rights agreement dated november 23 1998 chevron corporation chasemellon shareholder services llc rights agent filed exhibit 41 chevron corporations current report form 8k dated november 23 1998 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective october 30 1996 filed appendix b chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 102 chevron corporation excess benefit plan amended restated july 1 1996 filed exhibit 10 chevron corporations report form 10q quarterly period ended march 31 1997 incorporated herein reference 103 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 104 chevron restricted stock plan nonemployee directors amended restated effective april 30 1997 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 105 chevron corporation longterm incentive plan amended restated effective october 30 1996 filed appendix c chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 106 chevron corporation salary deferral plan management employees effective january 1 1997 filed exhibit 10 chevron corporations report form 10q quarterly period ended june 30 1997 incorporated herein reference exhibit index continued exhibit description 121 computation ratio earnings fixed charges page e1 211 subsidiaries chevron corporation page e2 231 consent pricewaterhousecoopers llp page e3 232 consent kpmg page e4 241 powers attorney directors certain officers chevron corporation authorizing signing annual report 2414 form 10k behalf 271 financial data schedule 991 definitions selected financial terms page e5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 575 market street san francisco california 94105 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs2 fs11 quarterly results stock market data fs11 report management fs12 report independent accountants fs12 consolidated statement income fs13 consolidated statement comprehensive income fs13 consolidated balance sheet fs14 consolidated statement cash flows fs15 consolidated statement stockholders equity fs16 notes consolidated financial statements fs17 fs31 supplemental information oil gas producing activities fs32 fs37 fiveyear financial summary fs38 fs1 managements discussion analysis financial condition results operations 1999 key indicators net income increased 55 percent 2070 billion exploration production operational earnings rose 80 percent average us crude oil realizations increased 41 percent 1611 per barrel average us natural gas realizations 7 percent 216 per thousand cubic feet international liquids production increased 10th consecutive year 4 percent refining marketing transportation operational earnings declined 44 percent lower margins worldwide net oil gas reserves additions exceeded production seventh consecutive year annual dividends increased 12th consecutive year chevrons net income 1999 2070 billion 55 percent 1998 net income 1339 billion 36 percent lower record earnings 3256 billion 1997 net special charges 216 million 1999 included losses asset writedowns environmental remediation provisions restructuring charges partially offset benefits sale assets net favorable adjustments prior years taxes litigation issues net lifo inventory gains net special charges 1998 included loss provision 637 million litigation substantially pertained lawsuit gulf oil cities service filed 1982 prior chevrongulf merger 1984 included net income foreign currency losses 38 million 1999 47 million 1998 gains 246 million 1997 net income companys individual business segments discussed results operations section environment outlook crude oil prices rose dramatically 1999 falling 20year lows late 1998 sharp rise prices largely driven agreements among organization petroleum exporting countries opec several larger nonopec producers curtail production spot price west texas intermediate wti benchmark crude oil averaged 1930 per barrel 1999 compared 1438 1998 2060 1997 1999 yearend wti spot price 2560 fluctuations natural gas prices hand dramatic crude oil average 1999 henry hub spot natural gas price 227 per thousand cubic feet 9 percent 1998 12 percent 1997 average crude oil prices remained strong early 2000 uncertain long high price levels continue factors may affect future price changes include opecs actions maintain change crude oil production quotas unforeseen supply disruptions worldwide inventory levels demand heating oil natural gas result winter weather conditions northern hemisphere demand refined products reflecting overall strength world economies high crude oil prices increase companys revenues earnings exploration production operations however higher crude oil prices could adversely affect financial results refining marketing chemicals businesses higher feedstock costs cannot recovered prices finished products company continues focus cost control businesses help sustain chevrons competitiveness worldwide regardless commodity price levels 1999 chevrons initiatives eliminate 500 million cost structure successful operating companies corporate departments streamlined mid2000 staff reductions approximately 10 percent yearend 1998 levels achieved successful containment costs improved operating cash flows 1999 enabled company maintain robust capital spending program recent period price volatility maintaining consistent level capital spending competitors cutting back low commodity prices gave company advantage rebound crude oil prices significant developments chevrons worldwide oil equivalentgas oeg production 3 percent 1999 international net oeg production increasing 7 percent chevrons 1999 worldwide oilequivalent barrels net proved reserves additions exceeded production seventh consecutive year companys reserves replacement 108 percent production 1999 including sales acquisitions key events 1999 early 2000 capture profitable growth opportunities follow upstream acquisitions chevron made two acquisitions 1999 help sustain companys growth international exploration production september acquisition petrolera argentina san jorge sa coupled award early 2000 rights partner petrobras 5050 exploration venture two promising deepwater blocks offshore brazil significant steps companys latin fs2 america growth strategy march purchase rutherfordmoran oil corporation assumption operatorship block b832 offshore thailand provided entry natural gas market southeast asia company began new production benchamas field offshore thailand announced new discoveries prospects acquisitions angola december oil production started chevronoperated 31 percentowned kuito field angolas first deepwater production block 14 recent successful completion appraisal wells benguela belize fields block 14 options development areas study company also began production banzala field block 0 concession adjacent block 14 developments help move chevron closer meeting objective boosting production angolan operations 600000 barrels per day 2002 1999 yearend level 460000 barrels per day nigeria company added 85 million barrels proved oilequivalent reserves nigeria 1999 operationally chevron taking active role eliminate flaring natural gas production facilities nigeria mitigating environmental effects monetizing extracted resource chevron named managing sponsor west african gas pipeline joint venture among six energy companies develop 600mile pipeline runs gas producing processing facilities nigeria ghana benin togo also agreement signed sasol synfuels international create new global joint venture gastoliquids gtl technology preliminary design engineering continue gtl facility nigeria convert natural gas synthetic liquid fuels processing commercial products deepwater gulf mexico chevron began producing first two deepwater projects gulf mexico genesis gemini gross oilequivalent production genesis operated 57 percentowned chevron reached 47000 barrels per day yearend gross oilequivalent production 40 percentowned gemini project reached 35000 barrels per day evaluation options way develop third gulf mexico deepwater project typhoon chevron operator 50 percent owner typhoon caspian sea region gross liquids production tengizchevroil tco 45 percentowned chevron averaged 214000 barrels per day 1999 increase 14 percent 1998 average production expanding production tcos employees surpassed 6 million work hours without losttime injury chevrons approximate share proved oilequivalent reserves added 1999 tengiz korolev fields 230 million barrels construction pipeline caspian pipeline consortium cpc continues schedule cpc shareholders approved 13 billion budget work plan 2000 began awarding construction contracts pipeline 15 percent owned chevron deliver crude oil tengiz field kazakhstan black sea port novorossiysk scheduled startup mid2001 additional export capacity provided pipeline important planned future expansions tco permit production reach production goal 700000 barrels per day 2010 canada 1999 significant natural gas discovery made northwest fort liard northwest territories canada plans developed construction production transportation facilities additional wells permit first production may 2000 second successful well completed january 2000 expected begin producing fourth quarter 2000 chevron operator 43 percent interest discoveries alberta canada chevron acquired 20 percent interest athabasca oil sands project completion construction startup project planned late 2002 represents longterm earnings growth opportunity expected gross production 155000 barrels per day production hibernia field chevron holds 27 percent interest averaged approximately 100000 barrels per day 1999 65000 barrels per day 1998 rates 150000 barrels per day achieved latter part year development drilling hibernia reservoir continued 1999 chemicals february 2000 chevron phillips petroleum company signed letter intent exclusivity agreement combine chemicals businesses joint venture chevron retain oronite additives business company 50 percent joint venture would 1999 sales 6 billion assets 6 billion combination subject final approval companies boards directors signing definitive agreements regulatory review expected completed mid2000 dynegy february 1 2000 chevrons affiliate dynegy inc merged illinova corporation energy services holding company illinois chevron invested additional 200 million maintain approximately 28 percent ownership merged company merger accelerate dynegys growth power generation marketing business ebusiness 1999 company implemented new growth initiative aimed developing business opportunities capitalizing internet technology february 2000 chevron ariba inc formed petrocosm marketplace global independent internet businesstobusiness marketplace owned buyers suppliers across energy industry also february chevron entered joint venture upstreaminfocom electronic data systems others allow sale information seismic data companies help energy businesses recapture costs data collection storage new technology ventures chevron established technology ventures unit 1999 company plans make equity investments broad portfolio emerging technology companies expertise information technology materials sciences biotechnology investments directed toward areas company could potentially customer new ventures year 2000 issue year 2000 issue result computer systems equipment embedded chips potentially unable process certain data accurately 2000 chevron established corporatelevel year 2000 project team 1998 coordinate companys efforts address issue date company fs3 major affiliates experienced significant disruptions operations result matter company used internal external resources year 2000 efforts cumulative cost company affiliates achieve year 2000 compliance estimated 170 million substantially spent yearend 1999 company believes addressed material issues could arise result year 2000 issue factors effect year 2000 problems thirdparty partners suppliers could cause actual effects year 2000 problems different companys current assessment factors could arise 2000 later year 2000 contingency plans incorporated companys existing contingency plans respond equipment failures emergencies business interruptions environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern manner company conducts operations also products sells costs complying myriad laws regulations pertaining company operations products embedded normal costs business using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1999 882 million consolidated companies included expenditures 183 million environmental capital expenditures 699 million costs associated control abatement hazardous substances pollutants ongoing operations 2000 total worldwide environmental capital expenditures estimated 178 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdparty waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed significant companys previously owned sites port arthur texas refinery company retained certain environmental cleanup obligations sold refinery 1995 anticipated costs accrued time sale reserves remain adequate expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative andor remedial work meet current standards following table displays yearend balances yearly changes companys beforetax environmental remediation reserves including superfund sites 1999 company recorded additional provisions estimated remediation costs refined products marketing sites refineries chemical manufacturing facilities previously sold oil gas producing properties provisions superfund law environmental protection agency epa designated chevron potentially responsible party otherwise involved remediation 307 hazardous waste sites company made expense provisions payments 1999 prior years 229 sites single site currently expected result material liability company remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposures superfund law provides joint several liability future actions epa regulatory agencies require chevron corporation assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity remediation reserves yearend 1999 1998 1997 superfund sites 33 million 44 million 52 million respectively likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs liabilities indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amount future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemicals concerns addition reserves environmental remediation discussed previously company maintains reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives many costs related environmental issues expense provisions recognized unitofproduction basis properties produced amount reserves yearend 1999 15 billion included accumulated depreciation depletion amortization companys consolidated balance sheet companys operating assets refineries chemical facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made fs4 litigation uncertainties chevron five oil companies filed suit 1995 contesting validity patent granted unocal corporation reformulated gasoline chevron sells california certain months year march 29 2000 u court appeals federal circuit upheld trial courts decision unocals patent valid company evaluate decision court appeals assess legal alternatives expects seek review rulings appropriate courts unocals patent ultimately upheld companys financial exposure includes royalties plus interest production gasoline ruled infringed patent result march 2000 ruling company expects record aftertax charge first quarter 2000 approximately 75 million fouryear period ending march 31 2000 majority charge pertains gasoline production earlier part period company modified manufacturing processes minimize manufacture patented formulations unocal also obtained additional patents alternate formulations could affect larger share us gasoline production believe additional patents invalid unenforceable however patents ultimately upheld competitive financial effects companys refining marketing operations presently indeterminable could material december 1999 chevron paid oxy usa inc 775 million settle longstanding lawsuit brought 1982 cities service co later acquired oxy gulf oil corporation later acquired chevron yearend 1998 chevron accrued loss provision 924 million provision exceeded settlement amount result company recognized 104 million additional net income 149 million tax 1999 along oil companies company party numerous lawsuits claims including actions challenging oil gas royalty severance tax payments based posted prices actions related use chemical mtbe certain oxygenated gasolines matters plaintiffs may seek recover large sometimes unspecified amounts others plaintiffs may seek company perform specific activities including remediation alleged damages matters may remain unresolved several years practical estimate range possible loss although losses could material earnings given period management believes resolution matters materially affect companys consolidated financial position liquidity higherthanexpected investment returns pension plan trust assets past years moderated us pension expense extended fully funded status companys main us pension plan effects may occur sustained basis future investment returns pension plan assets decline june 1997 caltex corporation received claim us internal revenue service irs 292 million excise taxes 140 million penalties 16 billion interest irs claim related crude oil sales japanese customers beginning 1980 settle claim december 1999 caltex paid tax interest 65 million less payment 12 million previously made irs companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys related operations results carefully considered management evaluating level current future activity countries chevron affiliates continue review analyze operations may close sell exchange purchase restructure assets achieve operational strategic benefits improve competitiveness profitability oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities may result significant losses gains future periods financial instruments company utilizes various derivative instruments manage exposure price risk stemming integrated petroleum activities instruments commonly used oil gas trading activities relatively straightforward involve little complexity generally shortterm duration activity instruments intended hedge physical transaction hence gains losses arising instruments offset recognized income concurrently recognition underlying physical transactions income company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps control systems designed monitor manage financial exposures accordance company policies procedures results operations financial position certain equity affiliates may however affected business activities involving use derivative instruments new accounting standards june 1998 financial accounting standards board fasb issued statement financial accounting standards sfas 133 accounting derivative instruments hedging activities amended sfas 137 accounting derivative instruments hedging activities deferral effective date fasb statement 133 implemented january 1 2001 basic rules new standard require derivative instruments recognized balance sheet fair values hedging activities changes fair value accounted accordance underlying hedged item thus hedging gains losses appear income offsetting gains losses stemming underlying exposure instances hedging gains losses reported comprehensive income component stockholders equity underlying exposure recognized net income rules may applied transactionbytransaction basis nonhedging derivative activity gains losses recognized currently income company implement sfas 133 january 1 2001 chevrons activity area minor derivative instruments used relatively straightforward fs5 involving little complexity company expect new standard significant effect earnings given period employee staff reductions restructurings second quarter 1999 chevron began implementing staff reduction program restructuring activities across company programs affect activities companys business segments net costs future savings relate termination relocation usbased employees restructuring costs 183 million reflected 1999 net income including estimated termination benefits 3472 employees restructuring costs included accrued employee termination benefits restructuringrelated pension settlement gains items also included 25 million chevrons share restructuring charges recorded caltex affiliate netincome effect costs estimated number employees excluding caltex employees separated presented business segment following table staff reductions completed mid2000 december 31 1999 termination payments made 2157 employees results operations sales operating revenues 354 billion 1999 compared 299 billion 1998 406 billion 1997 revenues 1999 increased primarily sharply higher prices crude oil refined products 1998 revenues 1997 levels primarily due lower crude oil natural gas refined products prices lower us natural gas production companys 1997 exit uk refining marketing business purchased crude oil products costs 1999 28 percent higher 1998 higher prices crude oil natural gas refined products chemicals feedstock however costs 11 percent lower 1997 prices fell precipitously 1998 begin recover second quarter 1999 income totaled 612 million 1999 386 million 1998 679 million 1997 changes net gains disposition assets changes interest income caused fluctuations years operating selling general administrative expenses excluding effects special items declined 6170 million 6251 million 1998 6549 million 1997 approximately 200 million 1998 decline resulted companys exit uk downstream business depreciation depletion amortization expenses increased 2866 million 2320 million 1998 2300 million 1997 due part asset impairments depreciation expense associated asset impairments 1999 394 million compared 100 million 1998 1997 increased production crude oil natural gas 1999 resulted higher depreciation expense 150 million companys worldwide upstream operations income tax expenses 1578 million 1999 495 million 1998 2246 million 1997 reflecting effective income tax rates 43 percent 27 percent 41 percent three years respectively increase 1999 effective tax rate reflects higher proportion earnings international operations taxed higher rates lower beneficial impact priorperiod tax adjustments settlement outstanding issues permanent differences 1999 lower tax credits proportion beforetax income factors slightly offset effect lower taxes taxable income received equity affiliates 1999 lower effective tax rate 1998 compared 1997 primarily reflects favorable priorperiod tax adjustments favorable adjustments associated finalization companys 1997 tax returns higher taxrelated credits connected utilization capital loss benefits shift international earnings mix lowertaxrate countries fs6 foreign currency losses decreased net income 38 million 1999 47 million 1998 gains increased net income 246 million 1997 amounts include companys share affiliates foreign currency gains losses 1999 companys foreign currency losses occurred primarily companys operations canada australia australian operations caltex significant losses 1998 caltexs operations korea thailand japan foreign currency gains 1997 occurred australia asian operating areas caltex generally currencies weakened us dollar us exploration production earnings 1999 excluding special items doubled 1998 earnings declined 16 percent 1997 levels changes largely tracked changes crude oil prices higher gains assets sales lower exploration expenses year helped offset declines production liquids natural gas effect net income special items years 1997 1999 shown following table companys average 1999 us crude oil realizations 1611 per barrel 469 higher 1998 157 lower 1997 average 1999 us natural gas prices 216 per thousand cubic feet 14 cents higher 1998 26 cents lower 1997 net liquids production year averaged 316000 barrels per day 3 percent 1998 8 percent 1997 net natural gas production 1999 averaged 1639 billion cubic feet per day 6 percent 1998 11 percent 1997 decline oilequivalent production reflects normal field declines asset sales partially offset new production gulf mexico production 1998 also adversely affected number storms gulf mexico including hurricane georges international exploration production earnings excluding special items 1999 increased 61 percent 1998 earnings 3 percent 1997 levels us upstream segment changes earnings largely reflected swings crude oil prices 1999 average crude oil prices return 1997 levels production grown year effect net income special items years 1997 1999 shown following table chevrons average liquids realizations including equity affiliates 1731 per barrel 1999 compared 1177 per barrel 1998 1797 per barrel 1997 average natural gas realizations fell 187 per thousand cubic feet 1999 compared 194 1998 210 1997 fs7 1999 net liquids production 811000 barrels per day increased 4 percent 1998 11 percent 1997 1999 production increases angola kazakhstan combined production properties acquired year argentina thailand offset declines australia indonesia nigeria 1998 operations kazakhstan offshore eastern canada indonesia angola congo principal sources production increases 1997 net natural gas production 874 million cubic feet 1999 34 percent 52 percent 1998 1997 respectively increases 1999 united kingdom well production properties acquired thailand argentina 1998 production rose indonesia nigeria well united kingdom upon startup britannia field 10 consecutive years international production proved reserves increased reflecting companys strategy expanding international upstream operations 1999 oeg production increased 7 percent yearend 1999 oeg proved reserves higher yearend 1998 6 percent company replaced 169 percent 1999 oeg production year including sales acquisitions us refining marketing transportation earnings excluding special items declined 1999 375 million strong earnings 1998 1997 633 million 662 million respectively earnings 1999 suffered compressed margins higher raw materials costs outpaced increases refined products sales realizations operating incidents richmond california refinery also contributed lower results effects offset partially increases refined products sales volumes proceeds business interruption insurance 1998 declines refined products margins adverse effects storms gulf mexico offset primarily decreases operating expenses increases refined products sales volumes also included 1998 results proceeds partial payment business interruption insurance well adjustments prior years taxes effect net income special items years 1997 1999 shown following table refined products sales volumes 1302 million barrels per day 1999 increased 5 percent 1998 9 percent 1997 sales increases 1999 reflected higher gasoline sales volumes including branded gasoline sales 545000 bpd increased 5 percent 1998 level 10 percent 1997 1999 us refined products sales realizations 2686 per barrel 20 percent 1998 7 percent lower 1997 international refining marketing transportation earnings include results consolidated refining marketing subsidiaries international marine operations equity earnings caltex excluding special items 1999 earnings 49 million 123 million 1998 367 million 1997 foreign currency losses 21 million 1999 compared losses 69 million 1998 gains 169 million 1997 effect net income special items years 1997 1999 shown following table caltex contribution segment results years 1997 1999 shown table adjusted basis caltex earnings declined 1999 due weak sales margins areas operations competitive pressures prevented refined products sales realizations rising sufficiently recover higher crude oil costs sales realizations 1998 decline fast raw material costs resulting higher sales margins adjusted earnings compared 1997 total international refined products sales volumes 1999 892000 barrels per day increasing 798000 1998 886000 1997 higher caltex sales volumes primarily responsible increase sales volumes 1998 lower 1997 result chevrons withdrawal refining marketing business united kingdom late 1997 excluding 1997 volumes discontinued uk business refined products sales volumes essentially flat 1998 1997 chemicals earnings excluding special items rose 36 percent 1999 205 million reach 224 million recorded 1997 earnings 1999 benefited improved sales margins major products higher sales vol fs8 umes lower operating expenses 1998 results affected adversely plant shutdowns expansions storm damage repairs earnings 2000 remain pressure industry overcapacity however companys sales volumes grew 1999 increasing 10 percent 1998 20 percent 1997 levels effect net income special items years 1997 1999 shown following table activities include coal operations interest expense interest income cash marketable securities real estate insurance activities corporate center costs net charges excluding special items 317 million 1999 compared 60 million 242 million 1998 1997 respectively effect net charges special items years 1997 1999 shown following table net income excluding special items companys coal operations 34 million 1999 compared 77 million 1998 41 million 1997 net income 1999 included net special benefits 26 million lower 1999 results due primarily absence earnings affiliate sold first quarter lower sales tonnage sales prices remaining coal business adjustments year carrying value remaining operations active negotiation sale late 1999 result unsuccessful negotiations sell companys coal operations final adjustments made reduce net carrying value assets longer held sale earnings 1998 contrast 1999 1997 benefited suspension depreciation expense part year heldforsale assets actively marketed prospective buyers net charges excluding special items balance segment 351 million 1999 137 million 1998 283 million 1997 higher interest expense lower interest income fewer favorable state federal income tax adjustments primary causes higher level charges 1999 compared 1998 included 1998 earnings net incremental benefits totaling approximately 80 million consisting primarily taxrelated credits connected utilization capital loss benefits receipt proceeds favorable insurance settlements net charges 1998 also included favorable taxrelated adjustments 1997 partially offsetting 1998 items higher interest expenses increased debt levels lower interest income liquidity capital resources cash equivalents marketable securities totaled 2032 billion yearend 1999 44 percent 1413 billion yearend 1998 cash provided operating activities 1999 4481 billion compared 3731 billion 1998 4880 billion 1997 cash provided operating activities 1999 benefited environment rising crude oil prices resulting impact companys earnings totally sufficient fund companys total cash needs result company increased borrowings 1999 14 billion supplement cash received operating activities proceeds sales assets provide funds acquisitions capital expenditure program dividend payments stockholders december 1999 payment 775 million occidental petroleum settlement cities service lawsuit 1998 cash provided operating activities sufficient fund companys investing activities also resulted increased borrowings year 1997 cash provided operating activities asset sales exceeded companys investment dividend requirements debt reduced october 1999 company increased quarterly dividend 61 cents 65 cents per share full year chevron paid dividends 248 per share compared 244 per share 1998 12th consecutive year dividend increases january 2000 company declared quarterly dividend 65 cents share common stock companys total debt capital lease obligations 8919 billion december 31 1999 increase 18 percent 7558 billion yearend 1998 1999 companys employee stock ownership plan esop borrowed total 645 million average interest rate 74 percent guaranteed chevron corporation debt proceeds 620 million paid chevron corporation exchange chevrons assumption existing 811 percent esop debt 620 million october 1999 company issued 500 million new 6625 percent notes chevron used proceeds new debt reduce shortterm debt primarily commercial paper additions longterm debt capital lease obligations 1999 excluding debt assumed acquisitions guarantees esop debt totaled 200 million additions longterm debt 1999 partially offset repayments existing longterm debt capital lease obligations 163 million repayments debt assumed acquisitions 386 million scheduled 70 million noncash retirement 811 percent esop debt also net additions 219 million shortterm debt fs9 primarily commercial paper excluding debt assumed acquisitions new guarantees esop debt december 31 1999 chevron 4750 billion committed credit facilities various major banks 2725 billion termination dates beyond one year facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 1999 addition chevron three existing shelf registrations file securities exchange commission together would permit registered offerings 28 billion debt securities increase 15 billion 1998 following new 2 billion shelf registration 1999 issuance 500 million new longterm debt existing shelf registration companys shortterm debt consisting primarily commercial paper current portion longterm debt totaled 6159 billion december 31 1999 total shortterm debt 2725 billion reclassified longterm debt yearend 1999 settlement obligations expected require use working capital 2000 company intent ability evidenced committed credit arrangements refinance longterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate companys future debt level dependent primarily cash provided operations capital spending program company believes substantial borrowing capacity meet unanticipated cash requirements companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1 standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service moodys counterparty rating chevron also aa2 ratings denote highquality investmentgrade securities december 1997 chevrons board directors approved repurchase 2 billion companys outstanding common stock use employee stock option programs march 24 2000 company purchased 107 million shares cost 826 million program financial ratios current ratio current assets current liabilities yearend two items negatively affected chevrons current ratio companys opinion affect liquidity current assets years included inventories valued lifo basis yearend 1999 lower current costs based average acquisition costs year 871 million also company continually refinances commercial paper yearend 1999 approximately 2066 billion commercial paper excluding 2725 billion reclassified longterm debt classified current liability although likely remain outstanding indefinitely company benefits lower interest rates available shortterm debt however chevrons proportionately large amount shortterm debt keeps ratio current assets current liabilities relatively low level interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrons interest coverage ratio improved significantly 1999 due higher beforetax income despite higher interest expense companys debt ratio total debttotal debt plus equity increased 1999 increase total debt proportionately higher increase stockholders equity capital exploratory expenditures worldwide capital exploratory expenditures 1999 totaled 6133 billion including companys equity share affiliates expenditures capital exploratory expenditures 5314 billion 1998 5541 billion 1997 expenditures exploration production including associated companys dynegy affiliate accounted 75 percent total outlays 1999 compared 61 percent 1998 65 percent 1997 international exploration production spending 78 percent worldwide exploration production expenditures 1999 compared 60 percent 1998 54 percent 1997 reflecting companys continuing focus international exploration production activities additionally 1999 expenditures included two significant acquisitions international exploration production areas rutherfordmoran oil corporation petrolera argentina san jorge sa companys segments lower expenditures 1999 1998 company reduced spending fund international exploration production activities company estimates capital exploratory expenditures 2000 52 billion including chevrons share spending affiliates 15 percent 1999 spending levels reflecting absence two significant 1999 acquisitions 2000 program provides 36 billion exploration production investments 64 percent international projects major areas emphasis exploration production kazakhstan west africa thailand canada deep waters gulf mexico us exploration production estimates include 390 million companys increased investment dynegy dynegys expenditures year successful implementation planned expenditure program 2000 depend upon many factors including ability partners many projects national petroleum companies producing countries fund shares project expenditures transportation expenditures estimated 420 million caspian sea region caspian pipeline consortium constructing pipeline refining marketing expenditures estimated 830 million 530 million planned projects united states spent marketing projects international downstream capital program fs10 invested companys caltex affiliate company tentative plans invest 200 million worldwide chemicals business 57 percent 1999 spending levels amount may change depending timing successful formation proposed chemicals joint venture phillips petroleum company fs11 report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements ensuring integrity objectivity statements prepared accordance accounting principles generally accepted united states fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited pricewaterhousecoopers llp independent accountants selected audit committee approved stockholders management made available pricewaterhousecoopers llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management david j oreilly martin r klitten stephen j crowe david j oreilly martin r klitten stephen j crowe chairman board vice president comptroller chief executive officer chief financial officer february 23 2000 report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheet related consolidated statements income comprehensive income stockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1999 1998 results operations cash flows three years period ended december 31 1999 conformity accounting principles generally accepted united states financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed pricewaterhousecoopers llp san francisco california february 23 2000 fs12 fs13 fs14 fs15 fs16 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies chevron corporation international company subsidiaries affiliates engages fully integrated petroleum operations chemicals operations coal mining united states 100 countries petroleum operations consist exploring developing producing crude oil natural gas transporting crude oil natural gas products pipelines marine vessels motor equipment refining crude oil finished petroleum products marketing crude oil natural gas refined petroleum products chemicals operations include manufacture marketing wide range chemicals industrial uses preparing consolidated financial statements company follows accounting policies accordance accounting principles generally accepted united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature companys operations many countries operates subject changing economic regulatory political conditions also company imports crude oil us refining operations company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method used oil gas exploration production activities derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs cash flows associated derivatives reported underlying hedged transactions cash flows subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income gains losses derivatives contracts qualify hedges recognized currently income shortterm investments shortterm investments classified available sale highly liquid debt equity securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities shortterm investments markedtomarket unrealized gains losses included comprehensive income inventories crude oil petroleum products chemicals stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment costs development wells related plant equipment proved mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed longlived assets including proved oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows impaired assets written estimated fair values generally discounted cash flows proved oil gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession basis impairment amounts recorded incremental depreciation expense period event occurs depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized fs17 note 1 summary significant accounting policies continued environmental expenditures environmental expenditures relate current ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs using currently available technology applying current regulations well companys internal environmental policies future amounts discounted recoveries reimbursements recorded asset receipt reasonably ensured currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions currently included income cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers recognized basis companys net working interest entitlement method stock compensation company applies accounting principles board apb opinion 25 accounting stock issued employees related interpretations accounting stock options presents note 19 pro forma net income earnings per share data accounting prescribed sfas 123 accounting stockbased compensation applied note 2special items financial information net income affected transactions unrelated necessarily representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net increase decrease net income related tax effects fs18 note 2 special items financial information continued financial information follows excess current cost based average acquisition costs year carrying value inventories lifo method used 871 584 1089 december 31 1999 1998 1997 respectively note 3 cumulative effect net income accounting changes april 1998 aicpa released statement position 985 reporting costs startup activities sop 985 introduced broad definition items expense incurred startup activities including new productsservices entering new territories initiating new processes commencing new operations chevron substantially compliance pronouncement however caltex capitalized types costs certain projects chevron recorded 25 share charge associated caltexs 1998 implementation sop 985 effective january 1 1998 chevron changed method calculating certain canadian deferred income taxes effective january 1 1998 benefit change 32 net benefit chevrons 1998 net income cumulative effect adopting sop 985 caltex change chevrons method calculating canadian deferred taxes immaterial note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following significant noncash transactions 1999 company acquired rutherfordmoran oil corporation petrolera argentina san jorge sa net cash component transactions included capital expenditures consideration rutherfordmoran transaction included 11 million shares companys treasury stock valued 91 1997 companys venice louisiana natural gas facility contributed partnership dynegy inc dynegy increase investments advances resulted primarily contribution properties plant equipment major components capital expenditures consolidated statement cash flows reconciliation amount total capital exploratory expenditures presented following table note 5 stockholders equity retained earnings december 31 1999 1998 include 2048 2121 respectively companys share undistributed earnings equity affiliates 1998 company declared dividend distribution one right purchase chevron participating preferred stock rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company amount chevron series participating preferred stock holder right entitled receive purchase price payable upon exercise chevron right subject adjustment person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase rights expire november 2008 may redeemed company 1 cent per right prior date rights voting dividend rights become exercisable dilutive effect earnings per share company five million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1999 made rights exercisable rights associated 1988 dividend distribution expired 1998 note 6 financial derivative instruments offbalancesheet risk company utilizes variety derivative instruments financial commoditybased hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity derivative instruments consist mainly futures contracts traded new york mercantile exchange international petroleum exchange crude natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated fs19 note 6 financial derivative instruments continued crude oil purchases sales product sales generally forecast occur within 60 90day period crude oil swaps used hedge sales forecasted occur within next four years terms swap contracts maturities period natural gas swaps used primarily hedge firmly committed sales terms swap contracts held yearend 1999 average remaining maturity 58 months gains losses derivative instruments offset recognized income concurrently recognition underlying physical transactions addition company 1998 entered managed programs using swaps options take advantage perceived opportunities favorable price movements natural gas results programs reflected income material 1998 company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures primarily anticipated purchase transactions forecasted occur within 90 days company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts made semiannually recorded monthly interest debt expense december 31 1999 one outstanding contract remaining term five years six months concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied companys counterparties derivative instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit negotiated contracts financial strength customer considered sufficient principal securities obtained support lines credit fair value fair values derived either quoted market prices available absence present value expected cash flows fair values reflect cash would received paid instruments settled yearend december 31 1999 1998 fair values financial derivative instruments longterm debt 2449 1403 estimated fair values 2430 1485 notional principal amounts interest rate swaps totaled 350 700 approximate fair values totaling 11 21 notional amounts derivative instruments represent assets liabilities company rather basis settlements contract terms company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 1762 1206 balances 1075 362 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately three years two years derivatives contract notional values follows crude oil products futures net contract values 143 33 forward exchange contracts contract values 123 180 gas swap contracts based notional gas volumes approximately 44 67 billion cubic feet crude oil swap contracts based notional crude volumes approximately 9 million barrels fair values derivatives material 1999 1998 deferred gains losses accrued consolidated balance sheet material note 7 summarized financial data chevron usa inc december 31 1999 chevron usa inc chevrons principal operating company consisting primarily us integrated petroleum operations excluding domestic pipeline operations effective february 1 1998 majority worldwide petrochemicals operations 1999 operations conducted primarily three divisions chevron usa production company chevron products company chevron chemical company llc summarized financial information chevron usa inc consolidated subsidiaries presented primary cause reduction net equity 1998 1999 return 2000 capital chevron corporation exchange loan note 8 summarized financial data chevron transport corporation limited effective july 1999 chevron transport corporation liberian corporation merged chevron transport corporation limited ctc bermuda corporation assumed assets liabilities fs20 note 8 summarized financial data chevron transport corporation limited continued chevron transport corporation ctc indirect wholly owned subsidiary chevron corporation ctc principal operator chevrons international tanker fleet engaged marine transportation oil refined petroleum products ctcs shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiarys obligations connection certain debt securities ctc deemed issuer accordance securities exchange commissions disclosure requirements summarized financial information ctc consolidated subsidiaries presented information derived financial statements prepared standalone basis conformity generally accepted accounting principles 1999 ctcs parent contributed additional 62 paidin capital separate ctc financial statements disclosures omitted information material investors debt securities deemed issued ctc restrictions ctcs ability pay dividends make loans advances december 31 1999 note 9 operating segments geographic data chevron manages exploration production refining marketing transportation chemicals businesses separately companys primary country operation united states country domicile remainder companys operations reported international outside united states since activities country meet requirements separate disclosure february 2000 chevron phillips petroleum company signed letter intent exclusivity agreement combine chemicals businesses joint venture company 50 percent joint venture would 1999 sales 6000 expected total assets 6000 combination subject final approval companies boards directors signing definitive agreements regulatory review expected completed mid2000 segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed corporation worldwide basis corporate administrative costs assets allocated operating segments instead operating segments billed direct corporate services nonbillable costs remain corporate center expenses aftertax segment operating earnings years 1999 1998 1997 presented following table segment assets segment assets include intercompany investments intercompany receivables assets consist primarily worldwide cash marketable securities company real estate information systems coal mining assets segment assets yearend 1999 1998 follows fs21 note 9 operating segments geographic data continued segment income taxes segment income tax expenses years 1999 1998 1997 follows segment sales operating revenues exploration production segments derived primarily production crude oil natural gas revenues refining marketing transportation segments derived refining marketing petroleum products gasoline jet fuel gas oils kerosene residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products chemicals segment revenues derived manufacture sale petrochemicals plastic resins lube oil fuel additives activities include corporate administrative costs worldwide cash management debt financing activities coal mining operations insurance operations real estate activities reportable operating segment sales operating revenues including internal transfers years 1999 1998 1997 presented table follows sales transfer products segments estimated market prices segment information investments earnings affiliated companies included segments affiliates operate dynegy inc included us exploration production pt caltex pacific indonesia cpi tengizchevroil tco included international exploration production caltex corporation included international refining marketing transportation companys affiliates material segments assets results operations information equity affiliates including carrying value equity earnings included note 12 additions longlived assets depreciation expense operating segment included note 13 fs22 note 10 litigation company party along oil companies numerous lawsuits claims including actions challenging oil gas royalty severance tax payments based posted prices actions related use chemical mtbe certain oxygenated gasolines actions plaintiffs may seek recover large sometimes unspecified amounts others plaintiffs may seek company perform specific actions including remediation alleged damages matters may remain unresolved several years practical estimate range possible loss although losses could material respect earnings given period management believes resolution matters result significant liability company relation consolidated financial position significant effect liquidity lawsuit los angeles calif brought 1995 company five oil companies contesting validity patent granted unocal corporation unocal certain types reformulated gasoline company sells california certain months year first two phases trial concluded 1997 jury upholding validity patent assessing damages rate 575 cents per gallon gasoline produced infringement patent march 1 july 1 1996 third phase trial judge heard evidence determine patent enforceable 1998 judge ruled patent enforceable defendants filed appeal january 1999 oral arguments made court july 1999 ultimate outcome matter cannot determined certainty company believes unocals patent invalid unfavorable rulings reversed upon appeal unocal also filed additional patents alternate formulations jurys finding unocals patent ultimately upheld companys financial exposure includes royalties plus interest past production gasoline ruled infringed applicable patent royalty payments future production gasoline infringes patent effect unfavorable rulings respect future reformulated gasoline production would depend availability alternate formulations industrys ability recover additional costs production prices charged customers company believes ultimate exposure matter materially affect financial position liquidity although costs resolution unfavorable ruling could material respect earnings given period note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows rental expenses incurred operating leases 1999 1998 1997 follows december 31 1999 future minimum lease payments operating capital leases follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time note 12 investments advances chevron owns 50 percent pt caltex pacific indonesia exploration production company operating indonesia caltex corporation subsidiaries affiliates conducts refining marketing activities asia africa middle east australia new zealand american overseas petroleum limited subsidiary manages certain companys operations indonesia companies subsidiaries affiliates collectively called caltex group tengizchevroil tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period chevrons ownership reduced 50 percent 45 percent april 1997 sale portion interest company obligation 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity amount included value investment company believed time continues believe payment beyond reasonable doubt given original intent continuing commitment fs23 note 12 investments advances continued parties realizing full potential venture 40year life chevron owns 28 percent dynegy inc gatherer processor transporter marketer energy products north america united kingdom products include natural gas natural gas liquids crude oil electricity market value chevrons shares dynegy common stock december 31 1999 1133 based quoted closing market prices february 2000 dynegy completed merger illinova corporation energy services holding company illinois chevron increased investment 200 maintain 28 percent ownership merged company received dividends distributions 268 254 335 1999 1998 1997 respectively including 212 167 207 caltex group 1998 dynegy repaid 155 loan chevron reflected decrease companys investment affiliate companys transactions affiliated companies summarized table follows primarily purchase indonesian crude oil cpi sale crude oil products caltex corporations refining marketing companies sale natural gas dynegy purchase natural gas natural gas liquids dynegy accounts notes receivable consolidated balance sheet include 277 156 december 31 1999 1998 respectively amounts due affiliated companies accounts payable includes 53 41 december 31 1999 1998 respectively amounts due affiliated companies equity earnings together investments advances companies accounted using equity method investments accounted cost follows following tables summarize combined financial information caltex group equitymethod companies together chevrons share amounts shown affiliates 100 percent fs24 note 13 properties plant equipment note 14 taxes us federal income tax expense reduced 89 84 93 1999 1998 1997 respectively lowincome housing business tax credits 1999 beforetax income including related corporate charges us operations 1254 compared 728 1998 2054 1997 international operations beforetax income 2394 1106 3448 1999 1998 1997 respectively deferred income tax provisions included costs 788 470 304 related properties plant equipment 1999 1998 1997 respectively companys effective income tax rate varied us statutory federal income tax rate following fs25 note 14 taxes continued increase 1999 effective tax rate prior year primarily due increased foreign taxes higher foreign earnings 1999 compared 1998 additional increases effective tax rate 1999 tax credits smaller proportion beforetax income 1999 1998 less beneficial priorperiod tax adjustments 1998 tax return compared 1997 tax return effects 1999 effective tax rate include settlement outstanding issues utilization additional capital loss benefits permanent differences factors slightly offset effect lower taxable income received equity affiliates 1999 company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1999 1998 deferred taxes classified consolidated balance sheet follows reported deferred tax balances composed following deferred tax liabilities assets companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 4602 december 31 1999 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 187 would payable upon remittance earnings note 15 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company entered interest rate swaps portion shortterm debt december 31 1999 1998 company swapped notional amounts 350 700 floating rate debt fixed rates effect swaps companys interest expense material note 16 longterm debt chevron three shelf registrations file securities exchange commission together would permit issuance 2800 debt securities pursuant rule 415 securities act 1933 yearend 1999 company 4750 committed credit facilities banks worldwide 2725 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate reserve adjusted domestic certificate deposit rate bank prime rate amounts outstanding credit agreements year yearend december 31 1999 1998 company classified 2725 shortterm debt longterm settlement obligations expected require use working capital 2000 company intent ability refinance debt longterm basis consolidated longterm debt maturing five years december 31 1999 follows 2000127 2001285 2002172 2003184 20041134 fs26 note 16longterm debt continued note 17 comprehensive income components changes comprehensive income related tax effects shown note 18 employee benefit plans pension plans company defined benefit pension plans employees provides certain health care life insurance plans active qualifying retired employees companys policy fund minimum necessary satisfy requirements employee retirement income security act companys pension plans companys annual contributions medical dental benefits limited lesser actual medical claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonfunded pension postretirement benefits paid directly incurred accordingly payments reflected changes plan assets table status companys pension plans postretirement benefit plans 1999 1998 follows fs27 note 18 employee benefit plans continued measurement purposes separate health care costtrend rates used preage 65 postage 65 retirees 2000 annual rates change assumed 52 percent 97 percent respectively gradually converging average ultimate rate 50 percent 2021 preage 65 postage 65 onepercentagepoint change assumed health care rates would following effects components net periodic benefit cost 1999 1998 1997 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 428 368 80 respectively december 31 1999 408 364 87 respectively december 31 1998 profit sharingsavings plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan charges expense profit sharing part profit sharingsavings plan 86 60 79 1999 1998 1997 respectively commencing october 1997 companys savings plus plan contributions funded leveraged esop shares employee stock ownership plan esop december 1989 company established leveraged esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock june 1999 esop borrowed 25 698 percent interest using proceeds pay interest due existing esop debt july 1999 companys leveraged esop issued notes 620 average interest rate 742 percent guaranteed chevron corporation debt proceeds paid chevron corporation exchange chevrons assumption existing 811 percent esop longterm debt 620 million esop provides partial prefunding companys future commitments profit sharingsavings plan result annual income tax savings company permitted aicpa statement position 936 employers accounting employee stock ownership plans company elected continue practices based statement position 763 accounting practices certain employee stock ownership plans subsequent consensus emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations company recorded expense esop 84 58 53 1999 1998 1997 respectively including 49 56 61 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 33 57 1999 1998 1997 respectively company made contributions esop 64 60 55 1999 1998 1997 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated accounts plan participants based debt service deemed paid year proportion total current year remaining debt service charge credit compensation expense 36 2 8 1999 1998 1997 respectively esop shares december 31 1999 1998 follows thousands 1999 1998 allocated shares 10785 10819 unallocated shares 12963 14087 total esop shares 23748 24906 management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units beginning awards deferred 1996 stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants charges expense combined man fs28 note 18 employee benefit plans continued agement incentive plans excluding expense related ltip stock options discussed note 19 stock options 41 28 55 1999 1998 1997 respectively chevron success sharing company program provides eligible employees annual cash bonus company achieves certain financial safety goals 2000 total maximum payout program 8 percent employees annual salary charges program 47 51 116 1999 1998 1997 respectively 2000 maximum payout program increases 10 percent note 19 stock options company applies apb opinion 25 related interpretations accounting stock options awarded broadbased employee stock option programs longterm incentive plan described compensation cost companys stock options determined based fair market value grant dates awards consistent methodology prescribed sfas 123 companys net income earnings per share 1999 1998 1997 would pro forma amounts shown effects applying sfas 123 pro forma disclosure indicative future amounts sfas 123 apply awards granted prior 1995 addition certain options vest several years awards future years whose terms conditions may vary anticipated longterm incentive plan stock options granted ltip generally awarded market price date grant exercisable earlier one year later 10 years date grant however portion ltip options granted 1996 terms similar broadbased employee stock options described following table maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year summary status stock options awarded companys ltip excluding awards granted terms similar broadbased employee stock options 1999 1998 1997 follows weightedaverage fair market value options granted 1999 1998 1997 2040 2110 1764 per share respectively fair market value option date grant estimated using blackscholes optionpricing model following assumptions 1999 1998 1997 respectively riskfree interest rate 55 45 61 percent dividend yield 30 31 28 percent volatility 201 286 152 percent expected life seven years december 31 1999 9602900 shares option exercise prices ranging 319375 9975 per share following table summarizes information stock options outstanding ltip excluding awards granted terms similar broadbased employee stock options december 31 1999 broadbased employee stock options 1996 company granted eligible employees option 150 shares stock equivalents exercise price 51875 per share addition portion awards granted ltip terms similar broadbased employee stock options issued february 1996 vesting contingent upon one two conditions met decem fs29 note 19 stock options continued ber 31 1998 price chevron stock closed 7500 per share three consecutive business days alternatively company highest annual total stockholder return competitor group years 1994 1998 options vested june 1997 share price performance condition met options 7204800 shares including similartermed ltip awards granted 1996 forfeitures options 820050 shares exercises 4171300 reduced outstanding option shares 2213450 december 31 1997 1998 exercises 1361000 forfeitures 10800 reduced outstanding option shares 841650 yearend 1998 1999 exercises 740725 forfeitures 61850 expirations 39075 reduced outstanding option shares zero march 31 1999 date expiration apb opinion 25 company recorded expenses 2 0 125 options 1999 1998 1997 respectively fair market value option share date grant sfas 123 estimated 566 using binomial optionpricing model following assumptions riskfree interest rate 51 percent dividend yield 42 percent expected life three years volatility 209 percent 1998 company announced new broadbased employee stock option program granted eligible employees option varied 100 300 shares stock equivalents dependent employees salary job grade options vest two years company highest total stockholder return among competitor group years 1994 1998 one year since stockholders return performance condition met options vested february 2000 options 4820800 shares awarded exercise price 763125 per share forfeitures options 854550 shares reduced outstanding option shares 3966250 december 31 1999 date none exercisable options expire february 11 2008 apb opinion 25 company recorded expenses 4 2 options 1999 1998 respectively fair value option share date grant sfas 123 estimated 1908 using average results blackscholes models preceding 10 years 10year averages assumption used blacksholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent note 20 earnings per share eps basic eps includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects deferrals well dilutive effects outstanding stock options awarded ltip broadbased employee stock option program see note 19 stock options following table sets forth computation basic diluted eps fs30 note 21other contingencies commitments us federal income tax california franchise tax liabilities company settled 1990 1991 respectively settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination december 31 1999 company subsidiaries direct indirect guarantors contingent liabilities 25 notes affiliated companies 362 notes others company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers financing arrangements aggregate amounts required payments various commitments 2000228 2001297 2002270 2003253 2004225 2005 after1029 total payments agreements 258 1999 201 1998 243 1997 company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemical concerns company believes material market credit risks operations financial position liquidity result commodities derivatives activities however results operations financial position certain equity affiliates may affected business activities involving use derivative instruments companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys operations related results carefully considered management evaluating level current future activity countries areas company significant operations include united states canada australia united kingdom norway congo angola nigeria democratic republic congo papua new guinea china indonesia venezuela thailand argentina companys caltex affiliates significant operations indonesia korea australia thailand philippines singapore south africa companys tengizchevroil affiliate operates kazakhstan note 22employee termination benefits restructuring costs company recorded beforetax charges income 235 1999 employee termination benefits restructuring costs part companywide staff reduction program charge includes severance termination benefits 220 3472 employees 82 employee office relocation lease termination penalties items charges offset partly 67 restructuringrelated net pension settlementcurtailment gains payments made terminated employees staff reduction program affects primarily usbased employees implemented companys operating segments across several business functions identified employees separated june 30 2000 termination benefits 3070 3472 employees accrued accordance sfas 88 employers accounting settlements curtailments defined benefit plans termination benefits payable assets companys us canadian pension plans payments employees company funds accrual payment activity employee termination benefits presented following table 82 relocations lease termination penalties costs approximately 13 percent remained unpaid end 1999 charges restructuringrelated pension gains classified mainly either operating expense selling general administrative expense items either accrued recognized incurred guidelines eitf issue 943 liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring sfas 88 applicable companys net income 1999 also included 25 share restructuring charge recorded caltex fs31 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities sfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables iii provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola congo democratic republic congo geographic category includes activities australia argentina united kingdom north sea canada papua new guinea venezuela china thailand countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia 45 percent 50 percent prior april 1997 equity share tengizchevroil tco exploration production partnership operating republic kazakhstan fs32 table iii results operations oil gas producing activities 1 companys results operations oil gas producing activities years 1999 1998 1997 shown following table net income exploration production activities reported page fs7 reflects income taxes computed effective rate basis accordance sfas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs7 fs33 fs34 table iv reserve quantity information companys estimated net proved underground oil gas reserves changes thereto years 1999 1998 1997 shown following table proved reserves estimated company asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually corporations reserves advisory committee ensure rigorous professional standards reserves definitions prescribed us securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves include additional quantities recoverable beyond term lease concession agreement may result extensions currently proved areas applying secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate june 1997 chevron assumed operatorship risked service agreement venezuelas block ll652 located northeast section lake maracaibo chevron accounting ll652 oil gas activity december 31 1999 recorded 54 million barrels proved crude oil reserves reserve quantities recorded companys service agreement venezuela began 1996 involving boscan field fs35 table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs36 changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included revisions previous quantity estimates fs37 fiveyear financial summary 1 fs38 caltex group companies combined financial statements december 31 1999 c1 caltex group companies combined financial statements december 31 1999 index page general information c3 c5 independent auditors report c6 combined balance sheet c7 c8 combined statement income c9 combined statement comprehensive income c9 combined statement stockholders equity c10 combined statement cash flows c11 notes combined financial statements c12 c24 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc collectively stockholders created 1936 two owners produce transport refine market crude oil petroleum products group comprised following companies caltex corporation company incorporated delaware corporate headquarters singapore many subsidiaries affiliates conducts refining transporting trading marketing activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas brief description companys operations items follows reported amounts us dollars caltex corporation caltex subsidiaries affiliates caltex operates approximately 55 countries principally africa asia middle east new zealand australia geographic areas comprise broad diversity mature developing emerging markets end 1999 total assets 79 billion sales 18 million barrels crude oil petroleum products per day total revenues 138 billion year caltex involved aspects downstream business marketing refining distribution transportation storage supply trading operations corporation also active petrochemical business affiliate korea yearend 1999 caltex 7200 employees majority refining certain marketing operations conducted joint ventures caltex equity interests 11 refineries equity refining capacity approximately 850000 barrels per day additionally interests two lubricant refineries 17 lubricant blending plants network ocean terminals depots caltex also interest fleet vessels owns equity interests numerous pipelines caltex conducts international crude oil petroleum product logistics trading operations subsidiary singapore p caltex pacific indonesia cpi holds production sharing contract psc central sumatra year 2021 cpi also acts operator sumatra eight petroleum contract areas 33 fields jointly held chevron texaco end 1999 cpi total assets 24 billion generated total revenues 11 billion year exploration pursued area comprising 183 million acres production established giant minas duri fields along smaller fields gross production fields operated cpi 1999 746000 barrels crude oil per day cpi entitlements sold stockholders use systems sell third parties yearend 1999 cpi approximately 5900 employees located indonesia american overseas petroleum limited aopl subsidiary provide services cpi manage certain exploration production operations geothermal power generation projects indonesia chevron texaco interests necessarily jointly yearend 1999 aopl approximately 213 employees 8 located united states c3 caltex group companies general information supplemental market risk disclosures group uses various derivative financial instruments hedging trading purposes instruments principally include interest rate andor currency swap contracts forward option contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales positions adjusted changes exposures hedged since group hedges portion market risk exposures exposure remains unhedged portion notes combined financial statements provide additional data relating derivatives applicable accounting policies debt debtrelated derivatives group exposed interest rate risk shortterm longterm debt variable interest rates approximately 22 billion 20 billion effects related net interest rate swaps 04 billion 05 billion december 31 1999 1998 respectively group seeks balance benefit lower cost variable rate debt inherent increased risk expensive lower risk fixed rate debt accomplished adjusting mix fixed variable rate debt well use derivative financial instruments principally interest rate swaps based overall interest rate exposure variable rate debt interest rate swaps december 31 1999 1998 hypothetical change interest rates 2 would change net income approximately 25 million 21 million 1999 1998 respectively crude oil petroleum product derivatives group uses established petroleum futures exchanges well overthecounter instruments including futures options swaps derivative products hedge portion market risks associated crude oil petroleum product purchases sales group also enters derivative contracts part crude oil petroleum product trading activities group net open petroleum derivative sales contracts approximately 127 million december 31 1999 net open petroleum derivative purchase contracts approximately 68 million december 31 1998 sensitivity contracts hypothetical 10 change crude oil petroleum product prices would change net income approximately 9 million 5 million 1999 1998 respectively currencyrelated derivatives group exposed foreign currency exchange risk countries operates hedge adverse changes foreign currency exchange rates us dollar group sometimes enters forward exchange options contracts depending exposure hedged group either purchases sells selected foreign currencies group net foreign currency purchase contracts approximately 279 million 370 million december 31 1999 1998 respectively hedge certain specific transactions net exposures including foreign currency denominated debt hypothetical 10 change exchange rates us dollar would result net material change groups operating results cash flows derivatives related underlying hedged positions 1999 1998 c4 caltex group companies general information new accounting standard statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities issued financial accounting standards board fasb 1998 sfas 133 establishes new accounting rules disclosure requirements derivative instruments hedge transactions june 1999 fasb issued sfas 137 deferred effective date sfas 133 group adopt sfas 133 effective january 1 2001 currently assessing effects adoption results operations financial position year 2000 compliance group subsidiaries affiliates experienced major disruptions system equipment problems resulting year 2000 y2k issue year 1999 first weeks 2000 group including share affiliates spent approximately 17 million y2k issues bringing total spent since 1998 approximately 32 million group anticipate spending significant additional funds y2k related activities c5 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1999 1998 related combined statements income comprehensive income stockholders equity cash flows years threeyear period ended december 31 1999 expressed united states america dollars combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1999 1998 results operations cash flows years threeyear period ended december 31 1999 conformity accounting principles generally accepted united states america discussed note 12 combined financial statements group changed method accounting startup costs 1998 comply provisions aicpas statement position 985 reporting costs startup activities kpmg llp kpmg singapore february 7 2000 c6 c7 c8 c9 c10 c11 caltex group companies notes combined financial statements note 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex corporation subsidiaries american overseas petroleum limited subsidiary pt caltex pacific indonesia intercompany transactions balances eliminated subsidiaries include companies owned directly indirectly 50 except cases control rest group groups accounting policies accordance us generally accepted accounting principles groups reporting currency us dollar translation foreign currencies us dollar functional currency principal subsidiary affiliate operations prior october 1 1997 group used local currency functional currency affiliates korea japan due regulatory environments countries regulatory environments korea japan changed 1997 group concluded deregulation korea japan represented significant change economic facts circumstances accordingly effective october 1 1997 group changed functional currency affiliates japan korea local currency u dollar change functional currency applied prospective basis estimates preparation financial statements conformity generally accepted accounting principles requires estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results may differ estimates shortterm investments highly liquid investments classified available sale maturity three months less purchased considered cash equivalents longer maturities classified marketable securities inventories valued lower cost current market except noted crude oil petroleum product inventory costs primarily determined using lastin firstout lifo method include applicable acquisition refining costs duties import taxes freight etc materials supplies stated average cost certain tradingrelated inventory highly transitory nature markedtomarket investments advances investments affiliates group ownership interest 20 50 majorityowned investments control rest group accounted equity method groups share earnings losses companies included current results recorded investments reflect underlying equity company investments affiliates carried cost dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing properties including intangible development costs determined using unitofproduction method assets depreciated class straightline basis using rates based upon estimated useful life class maintenance repairs necessary maintain facilities operating condition charged income incurred additions improvements materially extend life assets capitalized upon disposal assets net gain loss included income longlived assets including proved developed oil gas properties assessed possible impairment comparing carrying values undiscountedfuturenetbeforetax cash flows impaired assets written fair values impaired assets held sale recorded fair value less cost sell c12 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued deferred credits deferred credits primarily represent indonesian governments interest specific property plant equipment balances production sharing contract psc indonesian government retains majority equity share current production profits intangible development costs idc capitalized us generally accepted accounting principles successful efforts method treated period expenses psc reporting capitalized amounts depreciated accelerated rate psc reporting deferred credit balances recognize governments share idc reported capital costs life psc included income depreciation depletion amortization applied future production related profits derivative financial instruments energy trading contracts group uses various derivative financial instruments hedging purposes instruments include interest rate andor currency swap contracts forward options contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales prior realized gains losses hedges existing nonmonetary assets included carrying value assets gains losses related qualifying hedges firm commitments anticipated transactions deferred recognized income underlying hedged transaction recognized income derivative instrument ceases hedge related gains losses recognized currently income gains losses derivative instruments qualify hedges recognized currently income group also enters energy contracts part crude oil petroleum product trading activities trading contracts recorded market value related gains losses recorded net basis cost sales operating expenses market values change net gains losses trading contracts material groups results operations 1999 1998 accounting contingencies certain conditions may exist date financial statements issued may result loss group resolved one future events occur fail occur assessing contingencies necessarily involves exercise judgment assessing loss contingencies related legal proceedings pending group unasserted claims may result proceedings group evaluates perceived merits legal proceedings unasserted claims well perceived merits amount relief sought expected sought therein assessment contingency indicates probable material liability incurred amount loss estimated liability accrued groups financial statements assessment indicates potentially material liability probable reasonably possible probable cannot estimated nature contingent liability together estimate range possible loss determinable disclosed loss contingencies considered remote generally disclosed unless involve guarantees case nature amount guarantee would disclosed however instances disclosure otherwise required group may disclose contingent liabilities unusual nature judgment management legal counsel may interest stockholders others environmental matters groups environmental policies encompass existing laws country group operates groups internal standards expenditures create future benefits contribute future revenue generation capitalized future remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available undiscounted estimates using data primarily developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realizable revenue recognition general revenue recognized crude oil natural gas refined product sales title passes specified sales contract c13 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued reclassifications certain reclassifications made prior year amounts sales cost sales combined statement income conform 1999 presentation gains losses related certain commodity contracts note 2 asset sale 1997 caltex trading transport corporation subsidiary group sold cash 40 interest bahrain refining joint venture plus related assets net book value approximately 140 million note 3 inventories reported value inventory december 31 1999 less current cost approximately 104 million reported value inventory december 31 1998 approximated current cost 1998 1997 certain inventories recorded market lower lifo carrying value adjustments market reduced net income 18 million 1998 36 million 1997 market valuation adjustment reserves established prior years eliminated market prices improved 1999 physical units inventory sold elimination reserves increased net income 1999 71 million december 31 1999 inventories reported lifo carrying cost inventory quantities valued lifo basis reduced certain locations periods presented inventory reductions increased net income 1999 41 million decreased net income 4 million 5 million net related market valuation adjustments 1 million 14 million 1998 1997 respectively note 4 equity affiliates investments affiliates equity include following carrying value groups investment affiliates excess proportionate share affiliate net equity amortized approximately 20 years 1999 caltex corporation sold 50 interest koa oil company limited koa net book value approximately 219 million nippon mitsubishi oil corp approximately 237 million cash result sale caltex incurred additional us tax liabilities approximately 81 million c14 caltex group companies notes combined financial statements note 4 equity affiliates continued december 31 1997 caltex australia limited cal subsidiary group acquired remaining 50 australian petroleum pty limited appl subsidiary pioneer international limited approximately 186 million cash plus issuance additional 90 million shares cal stock result transaction groups equity cal declined 75 50 indirect equity appl increased 50 375 transaction recorded purchase cal classified affiliate individual assets liabilities excluded groups consolidated financial statements remaining interest star petroleum refining company ltd sprc owned governmental entity kingdom thailand provisions sprc shareholders agreement limit groups control provide active participation minority shareholder routine business operating decisions agreement also mandates reduction group ownership minority position year 2001 however likely requirement delayed view current economic difficulties region shown summarized combined financial information affiliates equity millions us dollars cash dividends received affiliates 71 million 50 million 43 million 1999 1998 1997 respectively summarized combined financial information shown includes cumulative effect accounting change 1998 described note 12 retained earnings december 31 1999 1998 includes 14 billion represents groups share undistributed earnings affiliates equity note 5 shortterm debt shortterm debt consists primarily demand promissory notes acceptance credits overdrafts current portion longterm debt weighted average interest rates shortterm financing december 31 1999 1998 65 73 respectively unutilized lines credit available shortterm financing totaled 08 billion december 31 1999 c15 caltex group companies notes combined financial statements note 6 longterm debt longterm debt related interest rates 1999 1998 consist following aggregate maturities longterm debt year follows millions us dollars 2000 148 included shortterm debt 2001 508 2002 333 2003 110 2004 21 thereafter 82 note 7 operating leases group operating leases involving various marketing assets net rental expense 112 million 103 million 105 million 1999 1998 1997 respectively future net minimum rental commitments operating leases noncancelable terms excess one year follows millions us dollars 2000 66 2001 42 2002 30 2003 13 2004 10 2005 thereafter 37 c16 caltex group companies notes combined financial statements note 8 employee benefit plans group various retirement plans including defined benefit pension plans covering substantially employees benefit levels vesting terms funding practices vary among plans following provides reconciliation benefit obligations plan assets funded status various plans primarily foreign inclusive affiliates equity c17 caltex group companies notes combined financial statements note 8 employee benefit plans continued 1999 reduction due sale investment koa see note 4 postretirement benefits comprised contributory healthcare life insurance plans one percentage point change assumed health care cost trend rate 89 would change postretirement benefit obligation 8 million would material effect aggregate service interest components note 9 commitments contingencies 1997 caltex received claim united states internal revenue service irs 292 million excise tax along penalties interest bringing total approximately 2 billion caltex required provide irs standby letter credit securing performance caltexs obligations irs claim upheld courts pursuant caltexs ongoing discussions irs justice department caltex offer settle claim accepted remaining amount assessment conceded december 22 1999 caltex settled claim amount tax 91 million plus accrued interest 557 million due terms settlement accordingly letter credit terminated parties filed stipulation united states court federal claims dismiss case dismissed majority settlement applied reserves established prior 1999 significant impact 1999 net income caltex also involved irs tax audits years 1987 1993 claims irs outstanding years opinion management adequate provision made income taxes years either examination subject future examination c18 caltex group companies notes combined financial statements note 9 commitments contingencies continued caltex certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer various lawsuits filed us philippines behalf least 3350 parties either survivors relatives persons allegedly died collision philippine waters december 20 1987 one vessel involved collision carrying products caltex philippines inc subsidiary caltex connection contract affreightment although caltex direct indirect ownership operational responsibility either vessel various theories liability alleged caltex major suit filed us louisiana state court mention specific monetary recovery although pleadings contain variety demands various categories compensatory well punitive damages consequently reasonable estimate damages involved sought made time caltex actively pursuing dismissal philippine litigation strength philippine supreme court decision absolving responsibility collision caltex also seeking dismissal louisiana litigation reliance various statutory procedural substantive grounds group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third parties groups opinion impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position liquidity results operations reasonable period time caltex subsidiary contractual commitment 2007 purchase petroleum products conjunction financing refinery owned affiliate total future estimated commitments contract based current pricing projected growth rates approximately 700 million per year purchases billions us dollars similar contracts 07 08 10 1999 1998 1997 respectively caltex contingently liable sponsor support funding maximum 278 million connection affiliates project finance obligations project operational since 1996 successfully completed mechanical technical reliability tests associated plant physical completion covenant however affiliate unable satisfy covenant relating working capital requirement result technical event default exists waived lenders enforced rights remedies finance agreements indicated intention affiliate current financial obligations anticipates resolving issue secured creditors restructuring discussions 1999 caltex sponsor provided temporary shortterm extended trade credit related crude oil supply outstanding balance owing caltex december 31 1999 149 million c19 caltex group companies notes combined financial statements note 10 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk groups outstanding commitments interest rate swaps foreign currency contractual amounts group enters interest rate swaps managing interest risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities ten years net unrealized gains losses contracts outstanding december 31 1999 1998 4 million 7 million respectively group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments contracts purchase foreign currencies principally australian singapore dollars hedging existing liabilities maturities two years net unrealized losses applicable outstanding forward exchange contracts december 31 1999 1998 5 million 23 million respectively group hedges portion market risks associated crude oil petroleum product purchases sales established petroleum futures exchanges used well overthecounter hedge instruments including futures options swaps derivative products gains losses hedges deferred recognized concurrently underlying commodity transactions deferred gains hedging contracts outstanding yearend 4 million 1999 8 million 1998 groups recorded value longterm debt exceeded fair value 22 million 34 million december 31 1999 1998 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents marketable securities notes accounts receivable current liabilities approximate fair value short maturities group investments debt securities availableforsale amortized costs 120 million 105 million december 31 1999 1998 respectively fair value securities december 31 1999 1998 approximated amortized costs december 31 1999 1998 investments debt securities availableforsale maturities less ten years groups carrying amount investments affiliates accounted equity included 2 million 19 million december 31 1999 1998 respectively tax unrealized net gains investments held companies group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentration risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer considered sufficient credit losses historically within managements expectations c20 caltex group companies notes combined financial statements note 11 taxes charged income consist following income taxes computed individual company basis rates effect various countries operation effective tax rate differs expected tax rate us federal corporate tax rate follows 1999 increase effective tax rate resulting sale investment affiliate net effect previously unrecorded foreign tax credit carryforwards 29 million 1998 increase effective tax rate c21 primarily due larger proportion earnings higher tax rate foreign jurisdictions effect foreign currency translation pretax income deferred income taxes provided tax jurisdiction temporary differences financial reporting tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax liabilities assets follows valuation allowance established reduce deferred income tax assets amounts groups judgement likely 50 utilized current future taxable income temporary differences become deductible undistributed earnings subsidiaries affiliates us deferred income tax provision made approximated 34 billion december 31 1999 december 31 1998 respectively earnings intended indefinitely reinvested become taxable us upon remittance dividends practical estimate amount tax may payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability excess us foreign income tax credits recorded realized note 12 accounting change affiliate group capitalized certain startup costs primarily organizational training period 19921996 related grassroots refinery construction project thailand costs considered part effort required prepare refinery operations issuance aicpas statement position 985 reporting costs startup activities costs would accounted period expenses group elected early adoption pronouncement effective january 1 1998 accordingly recorded cumulative effect charge income january 1 1998 50 million representing groups share applicable startup costs excluding cumulative effect change accounting startup costs materially affect net income 1998 c22 caltex group companies notes combined financial statements note 13 restructuringreorganization caltex recorded charge selling general administrative expenses 37 million 86 million 1999 1998 respectively various restructuring reorganization activities undertaken realign downstream operations along functional lines reduce redundant operating activities charges included severance termination benefits 23 million 60 million approximately 200 employees 500 employees 1999 1998 respectively less 100 affected employees remained end 1999 almost scheduled leave end march 2000 charges also included 12 million 10 million asset lease commitment writeoffs reorganization costs 2 million 16 million 1999 1998 respectively addition 1999 net income includes 27 million tax charge restructuring activities affiliates approximately 22 million total restructuring reorganization charges remained recorded liabilities december 31 1999 primarily relates future lease commitments vacated office space remaining lease term ending 2002 severance payments paid affected employees first quarter 2000 adjustments made 1999 liability recorded december 31 1998 insignificant following table summarizes restructuringreorganization costs related severance termination benefits 1999 1998 millions us dollars note 14 assets held disposal group continually reviews asset portfolio periodically sells otherwise disposes various assets longer fit groups strategic direction group recorded charge earnings approximately 30 million 1999 1998 12 million 1997 related various marketing assets primarily service station land buildings removed operation awaiting disposal sale buyers located carrying value assets based appraisals estimated selling prices december 31 1999 approximately 25 million effect suspending depreciation assets held sale 1999 1998 1997 material c23 caltex group companies notes combined financial statements note 15 combined statement cash flows changes operating working capital consist following net cash provided operating activities includes following cash payments interest income taxes deconsolidation caltex australia limited december 31 1997 described note 4 resulted noncash reduction following combined balance sheet captions 1997 included combined statement cash flows millions us dollars net working capital 60 equity affiliates 94 longterm debt 45 minority interest 109 significant noncash investing financing transactions occurred 1999 1998 note 16 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures affiliates equity accordingly disclosures presented herein c24item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements 2 financial statement schedules included page 26 annual report form 10k financial statement schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k filed company november 19 2001 report chevrontexaco filed following financial information • review operations 19982000 • audited supplemental combined financial statements 19982000 • supplemental information oil gas producing activities 19982000 • financial summary 19962000 • audited schedule ii valuation qualifying accounts schedule ii valuation qualifying accounts millions signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 27th day march 2002 chevrontexaco corporation david j o’reilly david j o’reilly chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 27th day march 2002 principal executive officers directors david j o’reilly david j o’reilly chairman board samuel h armacost samuel h armacost peter j robertson peter j robertson vicechairman board robert j eaton robert j eaton glenn f tilton glenn f tilton vicechairman board sam ginn sam ginn carla hills carla hills principal financial officer franklyn g jenifer franklyn g jenifer john watson john watson vicepresident finance chief financial officer j bennett johnston j bennett johnston principal accounting officer sam nunn sam nunn stephen j crowe stephen j crowe vicepresident comptroller charles r shoemate charles r shoemate frank shrontz frank shrontz lydia beebe lydia beebe attorneyinfact thomas vanderslice thomas vanderslice carl ware carl ware john young john young index management’s discussion analysis consolidated financial statements supplementary data fs1 management’s discussion analysis financial condition results operations texaco merger transaction october 9 2001 texaco inc texaco became wholly owned subsidiary chevron corporation chevron pursuant merger transaction chevron changed name chevrontexaco corporation combination accounted pooling interests share texaco common stock converted taxfree basis right receive 077 shares chevrontexaco common stock merger chevrontexaco issued approximately 425 million shares common stock representing 40 percent outstanding chevrontexaco common stock merger accordance poolingofinterests accounting accompanying audited consolidated financial statements give retroactive effect merger periods presented chevron texaco always combined result merger accounts certain operations jointly owned combining companies consolidated accompanying financial statements operations primarily caltex group companies previously owned 50 percent chevron texaco key financial results chevron divided premerger chevrontexaco’s net income 3288 billion significantly 2000 slightly higher 1999 net income 2001 included net charges 1743 billion special items 1779 billion merger effects combined total 3522 billion special items included asset writedowns 1709 billion primarily exploration production upstream properties result downward revisions estimated proved crude oil reserves merger effects represented mergerrelated expenses 1136 billion net losses mergerrelated asset dispositions 643 million 2000 1999 net special charges 378 million 191 million respectively net income special items individual business segments discussed results operations section beginning page fs4 net income major operating area1 earnings major operating area excluding special items merger effects1 business environment outlook chevrontexaco’s overall operating earnings depend largely profitability upstream exploration production downstream refining marketing transportation businesses upstream operating earnings align closely industry price levels crude oil natural gas decline company’s upstream operating earnings 2001 tracked downward slide prices commodities price trend crude oil largely caused reduced demand weakened economies worldwide relative oversupply opec certain oilproducing countries fs2 average spot price 2001 west texas intermediate wti benchmark crude oil 26 per barrel average 30 2000 ended year 20 similar trend existed certain natural gas prices sensitive regional supplydemand balances united states company’s average natural gas sales realization started 2001 1000 per thousand cubic feet end year average realization dropped 300 early 2002 wti crude oil price moved 20 per barrel company’s us average natural gas realization remained 300 per thousand cubic feet earnings 2001 also dampened slightly lower oilequivalent production less 2 percent 2000 levels however company anticipates oilequivalent production growth rate next five years 25 3 percent annually although 2002 production expected increase 1 percent opecrelated constraints downstream operating earnings closely tied refining marketing margins vary among geographic areas company operates although worldwide demand refined products weakened overall 2001margins fluctuated regional supplydemand balances example margins improved north america prior year sales volumes increased highervalue products margins also improved asia middle east eastern africa operating areas however europe latin america certain western african countries changes product prices able keep pace feedstock costs margins suffered early 2002 profitability weak geographic areas expected rebound earnest world economies product demand improve company’s chemical segment profitable 2001 significant improvement certain commodity chemicals expected demand closely matches industry capacity merger effects within 18 months merger chevrontexaco expects realize pretax savings approximately 18 billion annually operating efficiencies elimination redundant facilities operations significant onetime expenses incurred connection merger total beforetax mergerrelated expenses time merger announcement october 2000 end 2003 estimated 2 billion major expenses include employee severance payments incremental pension medical plan costs associated workforce reductions legal accounting sec filing investment banker fees employee office relocations costs elimination redundant facilities operations 2001 1563 billion beforetax 1136 billion tax mergerrelated expenses recorded included accruals 891 million employee termination benefits approximately 4500 employees mergerrelated expenses benefit future operations payments accruals 105 million approximately 1400 employees terminated merger 2001 yearend 2001 accrual balance 786 million expected nearly extinguished early 2003 certain terminating employees eligible delay separation payments one year condition approving merger us federal trade commission ftc required disposition certain texaco assets including investments equilon motiva joint ventures engaged us refining marketing transportation businesses interests joint ventures placed trust time merger chevrontexaco longer exercised control joint ventures accordingly method accounting investments changed fourth quarter 2001 equity cost basis based terms sale closed february 2002 company recorded aftertax charge 564 million 2001 anticipated loss cash proceeds sale received 2002 22 billion indemnification chevrontexaco certain equilon motiva contingent liabilities date sale discussed “on offbalancesheet arrangements” section page fs8 additional aftertax charges 79 million recorded 2001 mergerrelated asset dispositions expected result proceeds approximately 75 million including loss equilon motiva sale total charges mergerrelated asset dispositions 643 million recorded 2001 classified “extraordinary item” consolidated statement income accordance poolingofinterests reporting requirements accounting principles board apb opinion 16 “business combinations” net book value asset sales completed yearend 2001 2181 billion classified “assets held sale merger related” “current assets” section consolidated balance sheet net income 2001 mergerrelated assets sold approximately 375 million operating highlights developments key operating highlights events 2001 early 2002 included worldwide oil gas reserves company added approximately 12 billion barrels oilequivalent reserves 2001 additions equated 127 percent production year included slightly 100 million barrels tengiz field kazakhstan hamaca project venezuela result drilling activities almost 200 million oilequivalent barrels added natural gas reserves several fields nigeria 160 million barrels additions year result successful discoveries areas included latin america north sea west africa also approximately 175 million equivalentbarrels acquired early 2001 purchase additional 5 percent interest tengizchevroil company’s 50 percentowned affiliate kazakhstan operates tengiz korolev fields angola approximately 30000 barrels per day total crude oil production began companyoperated phase 1c development deepwater kuito field block 14 company holds 31 percent interest block 0 north nemba production gas injection platform installed march 2001 yearend total oil production exceeded 30000 barrels per day continuation north nemba development program 2002 result average production 40000 barrels per day company operator holds 39 percent interest fs3 nigeria escravos gas project successfully completed phase 2 development 2001 increasing processing capacity 285 million cubic feet gas per day upon completion phase 3 2005capacity expected increase 680 million cubic feet per day company holds 40 percent working interest escravos project frontend engineering design started march 2001 gastoliquids project escravos first project use sasol chevron global joint venture technologies company holds 38 percent interest project chadcameroon doba oil field development 35 billion project including 650mile pipeline reached onethird completion end 2001 initial total production 225000 barrels crude oil per day expected 2004 company holds 25 percent interest project kazakhstan tengizchevroil tco increased total production eighth straight year averaging 268000 barrels per day crude oil engineering next major expansion way expected come line 2005 company holds 50 percent interest tco october first tankers loaded crude oil caspian pipeline consortium cpc facilities near black sea port novorossiysk cpc’s pipeline connects tengiz field western kazakhstan novorossiysk enabling full access world market prices tengiz oil greatly reduces transportation costs cpc owned 15 percent chevrontexaco uk north sea december 2001 chevrontexaco received government approval develop companyoperated alba extreme south caledonia projects north sea located company’s central north sea core area includes producing alba britannia fields frfirst oil production alba extreme south project scheduled fourth quarter 2002 help maintain alba’s total field production 80000 barrels crude oil per day chevrontexaco operates field holds 21 percent ownership first oil caledonia expected late third quarter 2002 peak field production anticipated 13000 barrels per day company holds 27 percent interest philippines gas production commenced october malampaya field offshore philippine island palawan chevrontexaco 45 percent interest landmark gastopower project largest single foreign investment firstever offshore production natural gas philippines australia company made two significant natural gas discoveries offshore western australia located permit area wa267p company operates holds 50 percent interest 2001 company approved development 16 billion lng expansion project north west shelf venture mid2004 startup increase gross liquefied natural gas capacity 50 percent company holds onesixth interest china 2001 average 18000 barrels per day total lowsulfur crude oil produced october startup qhd 326 field china’s bohai bay chevrontexaco holds 245 percent interest bangladesh april 2001 chevrontexaco awarded 60 percent interest 17 millionacre onshore tract block 9 bangladesh east dhaka block 9 surrounds bakhrabad gas field adjacent major gasproducing areas seismic studies planned 2002 initial drilling commence late 2002 early 2003 venezuela company holds 30 percent interest hamaca integrated oil project located venezuela’s orinoco belt early production established october 2001after completion crude oil upgrading facilities 2004 hamaca total production expected increase 190000 barrels per day us gulf mexico typhoon deepwater development project completed budget production commenced july 2001 two months ahead schedule daily total production averaged 39000 oilequivalent barrels end year chevrontexaco operator 50 percent interest us refining december company approved 150 million project pascagoula mississippi refinery produce lowsulfur gasoline meets anticipated new us environmental protection agency standards regulatory permits secured activities commence 2002 project expected take year complete chevron phillips chemical company cpchem company’s 50 percentowned cpchem affiliate engaged joint venture bp solvay build new highdensity polyethylene hdpe facility cpchem’s cedar bayou texas facility track startup late 2002 700 million poundsperyear hdpe facility largest kind world worldscale olefins polyolefins complex qatar also expected start production late 2002 facility owned operated qatar chemical company joint venture cpchem 49 percent interest qatar general petroleum dynegy inc november 2001 chevrontexaco acquired 15 billion redeemable convertible preferred shares dynegy affiliate early 2002 chevrontexaco purchased approximately 200 million additional dynegy common shares maintain 265 percent ownership interest following dynegy’s public equity offering december 2001 results operations sales operating revenues 104 billion 2001 compared 117 billion 2000 84 billion 1999 revenues 2001 declined lower average realizations crude oil refined products increase 2000 1999 primarily result sharply higher prices crude oil natural gas refined products effect higher prices 2000 partially offset absence chemicals revenues second half year due july 1 2000 formation cpchem accounted equity method income equity affiliates totaled 11 billion 2001 11 billion 2000 09 billion 1999 equity income increased marginally 2001 strength improved earnings equilon motiva dynegy partially offset lower earnings tengizchevroil lgcaltex larger losses cpchem 2000 increases earnings tengizchevroil motiva partially offset lower earnings equilon lgcaltex losses cpchem income totaled 07 billion 2001 10 billion 2000 08 billion 1999 fluctuations years result changes net gains losses asset sales interest income investments fs4 purchased crude oil products costs 605 billion 2001 lower 698 billion 2000 primarily due lower crude oil prices 30 percent higher 463 billion 1999 average crude oil prices recovering 20year lows occurred 1998 offsetting effect higher prices since 1999 absence costs associated chemicals operations contributed cpchem july 2000 operating selling general administrative expenses excluding effects special items 115 billion 2001 2000 similar expenses 1999 108 billion reflecting mainly higher fuel costs company’s plants facilities mitigating effect since mid2000 absence expenses associated chemicals operations contributed cpchem exploration expenses 10 billion 2001 compared 09 billion 2000 11 billion 1999 2001 well writeoffs 184 million higher compared 2000 offset declines exploration expenses increased writeoffs reflected part reprioritization development opportunities postmerger depreciation depletion amortization expense 71 billion 2001 compared 53 billion 2000 49 billion 1999 depreciation expense associated asset impairments 23 billion 2001 compared 07 billion 2000 04 billion 1999 adjusting effect impairments expense amounts 48 billion 2001 46 billion 2000 45 billion 1999 higher expense 2001 adjusted basis resulted higher capital spending reserve revisions additional abandonment provisions 2000 higher 1999 production years increased expense 2000 also reflected lower depreciation chemicals resulting cpchem joint venture formation income tax expenses 44 billion 2001 63 billion 2000 26 billion 1999 reflecting effective income tax rates 53 percent 45 percent 44 percent three years respectively increase 2001 effective tax rate primarily due us beforetax income generally subject lower tax rate significantly smaller percentage overall beforetax income 2001 compared 2000 decline us beforetax income arose primarily substantially 2001 mergerrelated expenses associated operations united states foreign currency gains 2001 191 million compared gains 182 million 2000 losses 15 million 1999 approximately 150 million gains 2001 attributable devaluation argentine peso late year excluding impact currency gains lower 2000 primarily due fluctuations netherlands australian currencies losses 1999 primarily australia us exploration production us exploration production earnings excluding special items declined 2001 primarily significantly lower crude oil prices oilequivalent production also 8 percent higher earnings 2000 compared 1999 mainly result increased prices crude oil natural gas partially offsetting benefit higher prices decline oilequivalent production 7 percent years company’s average 2001 us crude oil realization 2170 per barrel compared 2669 2000 1550 1999 average us natural gas realization 438 per thousand cubic feet 2001 compared 387 212 2000 1999 respectively net liquids production 2001 averaged 614000 barrels per day 8 percent 2000 14 percent 1999 net natural gas production averaged 27 billion cubic feet per day 2000down 7 percent 2000 14 percent 1999 lower oilequivalent production reflected normal field declines asset sales partially offset new enhanced production deep water areas gulf mexico special items 2001 included 10 billion impairment midway sunset field california’s san joaquin valley impairment result writedown proved crude oil reserve quantities upon determination lowerthanprojected oil recovery field’s steam injection process international exploration production international exploration production earnings excluding special items declined 2001 primarily lower average crude oil prices partially offsetting effect increase 3 percent oilequivalent production higher natural gas prices earnings 2000 improved 1999 significantly higher crude oil natural gas prices oilequivalent production years flat fs5 average liquids realization including equity affiliates 2217 per barrel 2001 compared 2604 2000 1657 1999 average natural gas realization 236 per thousand cubic feet 2001 compared 209 2000 166 1999 daily net liquids production 1345 million barrels 2001 increased 1 percent 1330 million barrels 2000 1337 million barrels 1999 production increases kazakhstan 2001 offset lower volumes indonesia 2000 increases argentina kazakhstan kuwait thailand offset declines indonesia united kingdom net natural gas production 1711 billion cubic feet per day 2001 10 percent 2000 13 percent 1999 notable among geographic areas production increases kazakhstan trinidad canada 2000 production increases primarily argentina colombia kazakhstan thailand partially offset lower production normal declines mature fields canada united kingdom special items 2001 included 247 million impairment ll652 field venezuela slowerthanexpected reservoir repressurization resulted reduction projected volumes oil recoverable company’s remaining contract period operation us refining marketing transportation us refining marketing transportation earnings 2001 excluding special items increased 37 percent 1332 billion doubled 1999 earnings 638 million amounts included company’s share equity income equilon motiva joint ventures october 2001 merger interests placed trust postmerger investments accounted cost basis earnings included dividend income component income rather equity income recognized premerger earnings increases 2001 reflected significantly higher gasoline sales margins especially early year partially offset weaker distillate sales margins higher operating expense higher sales volumes across major product lines also contributed improvement earnings 2000 improved 1999 particularly east gulf coasts earnings 1999 suffered lower sales margins operational problems company’s california refineries refined products sales volumes 2577 million barrels per day 2001 decreased 3 percent 2000 2 percent 1999 2001 sales volumes reflected premerger sales equilon motiva sales 2000 suffered effect 1999 yearend stockpiling customers anticipation possible year 2000related interruptions average us refined products sales realization 3045 per barrel 2001 25 percent 2000 average 4075 19 percent depressed levels 1999 international refining marketing transportation international refining marketing transportation earnings include results company’s consolidated refining marketing businesses international marine operations international supply trading activities equity earnings primarily asiapacific affiliates excluding special items 2001 earnings 598 million 14 percent 2000 3 percent lower 1999 earnings asia middle east eastern africa south africa operating areas improved significantly 2001 improved marketing margins particularly early year partially offsetting marketing improvement higher costs somewhat lower refining margins earnings decreased 2000 compared 1999 lower marketing margins refined products sales volumes region suffered competitive operating environment including excess refinery capacity european operations suffered low marketing refining margins lower sales volumes 2001 compared prior years primarily due weaker economic conditions latin american earnings nearly level 2000with improved refining margins almost offsetting declining sales volumes marketing margins 2000 weaker margins latin america west africa resulted lower earnings compared 1999 partially offset increased earnings europe driven higher margins united kingdom netherlands international refined products sales volumes 2495 million barrels per day 2001 1 percent 2521 million 2000 5 percent lower 2621 million 1999 weaker economic conditions particularly europe dampened demand 2001 lower trading volumes third quarter 1999 sale company’s equity interest koa oil company limited japan responsible decline sales volumes 2000 fs6 chemicals earnings include results company’s oronite division company’s petrochemicals business prior contribution cpchem july 2000 equity earnings cpchem date excluding effect special items segment recorded loss 32 million 2001 compared earnings 130 million 2000 174 million 1999 results years reflected protracted period generally weak demand commodity chemicals industry overcapacity special items 2001 2000 include writedowns cpchem operations puerto rico selected operating data mbpd thousands barrels per day mmcfpd millions cubic feet per day bbl barrel mcf thousands cubic feet 1 includes equity affiliates 2 includes equilon motiva premerger 3 represents total field production boscan operating service agreement venezuela 2000 included colombian operating service agreement consists coal mining operations company’s equity interest dynegy inc gatherer processor transporter marketer energy products corporate administrative costs worldwide cash management debt financing activities power gasification ventures technology investments real estate insurance activities earnings excluding special items coal operations 19 million 2001 compared 1 million 2000 34 million 1999 improved earnings 2001 resulted increased sales volumes productivity improvements absence work stoppage 2000 lasted several months company’s share dynegy earnings special items 2001 175 million 119 million 2000 44 million 1999 significantly higher prices natural gas natural gas liquids increase earnings power generation activities primary reasons improved results 2001 previous periods net charges balance segment excluding special items 1077 billion 2001 1003 billion 2000 977 million 1999 increases various corporate expenses essentially offset benefits lower interest expense higher interest income 2001 2000 merger effects 2001 represented sum 1136 billion mergerrelated expenses 643 million losses mergerrelated asset dispositions liquidity capital resources cash equivalents marketable securities approximately 32 billion end 2001 2000 cash provided operating activities 2001 115 billion compared 135 billion 2000 78 billion 1999 cash provided asset sales 03 billion 2001 12 billion 2000 16 billion 1999 2001 company’s overall debt levels increased 174 billion december 31 2001 compared 159 billion december 31 2000 improved cash flows 2000 permitted company reduce overall debt levels 32 billion repurchase 15 billion company’s common shares net sales addition company received cash distribution 835 million 2000 cpchem joint venture obtained debt financing 1999 payment 775 million made occidental petroleum settlement cities service lawsuit fs7 february 2002 company completed sale investments equilon motiva shell saudi refining inc proceeds 22 billion dividends chevrontexaco paid common stock dividends 2733 million 2664 million 2589 million 2001 2000 1999 respectively dividends texaco preferred shares 6 million 15 million 28 million 2001 2000 1999 respectively addition dividends 119 million 110 million 55 million paid three years stockholders hold minority interests chevrontexaco subsidiary companies debt lease minority interest obligations chevrontexaco’s total debt capital lease obligations 174 billion december 31 2001 159 billion yearend 2000 addition december 31 2001 company minority interest obligations 283 million 746 million december 31 2000 2001 net repayments 24 billion longterm debt offset proceeds 38 billion new shortterm debt changes longterm debt 2001 included noncash reduction 100 million esop debt addition repayments longterm debt 2001 463 million monthly income preferred shares accounted minority interest 300 million texaco market auction preferred shares redeemed yearend 2001 chevrontexaco 32 billion committed credit facilities various major banks permit refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 2001 addition chevrontexaco three existing “shelf” registrations file securities exchange commission together would permit registered offerings 28 billion debt securities additionally december 31 2001 company lines credit available shortterm financing totaling 500 million 210 million utilized company’s debt due within 12 months consisting primarily commercial paper current portion longterm debt totaled 116 billion december 31 2001 82 billion december 31 2000 total shortterm debt 32 billion reclassified longterm yearend 2001 settlement obligations expected require use working capital 2002 company intent ability evidenced committed credit facilities refinance longterm basis company’s practice continually refinance commercial paper maintaining levels believes appropriate company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions company believes substantial borrowing capacity meet unanticipated cash requirements periods sustained low crude oil natural gas prices levels approximately 20 per barrel west texas intermediate benchmark crude oil 250 per thousand cubic feet henry hub benchmark natural gas narrow refined products margins cash provided operating activities asset sales may sufficient fund company’s investing activities may result increased borrowings reduction overall cash levels chevrontexaco’s senior debt rated aa standard poor’s corporation aa2 moody’s investor service except senior debt texaco inc rated aa3 chevrontexaco’s us commercial paper rated a1 standard poor’s prime 1 moody’s company’s canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities share repurchase programs december 1997 chevron’s board directors approved repurchase 2 billion company’s outstanding common stock use employee stock option programs total repurchases program’s inception end 2000 233 million shares cost 19 billion program formally terminated september 2001 march 1998 texaco’s board directors approved repurchase 1 billion texaco’s outstanding common stock program suspended october 2000 prior announcement planned merger chevron time 114 million shares acquired cost 643 million offbalancesheet arrangements following tables summarize company’s material offbalancesheet obligations yearend 2001 contractual obligations commercial commitments balance sheet fs8 chevrontexaco provided certain indemnities contingent liabilities equilon motiva shell oil saudi refining inc part agreement sale company’s interests investments generally indemnities provided limited contingent liabilities may mature within 18 months sale company’s interests reduced reserves established prior sale excluding environmental liabilities company’s financial exposure related indemnities contractually limited 300 million additionally company provided indemnities certain environmental liabilities arising conditions existed prior formation equilon motiva periods chevrontexaco’s ownership interest entities well customary representation warranties within agreements offbalancesheet arrangements company securitizes certain accounts receivable downstream business use qualifying special purpose entities spes december 31 2001 approximately 850 million representing 10 percent chevrontexaco’s total current accounts receivable balance securitized chevrontexaco’s total estimated financial exposure arrangements december 31 2001 approximately 50 million arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experiencing major defaults collection receivables chevrontexaco would loss exposure connected thirdparty investments securitization arrangements information also read conjunction note 22 consolidated financial statements contingencies commitments page fs40 financial ratios yearend current ratio current assets current liabilities generally two items adversely affected chevrontexaco’s current ratio company’s opinion affect liquidity first current assets years included inventories valued lifo basis yearend 2001 lower replacement costs based average acquisition costs year nearly 16 billion also company carries larger percentage shortterm debt benefits lower interest cost continually refinancing commercial paper interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrontexaco’s interest coverage ratio lower 2001 primarily due lower beforetax income partially offset lower interest expense result replacing longterm debt lower interest rate commercial paper obligations company’s debt ratio total debt divided total debt plus equity increased 339 percent 2001 due increase total debt year financial ratios financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related volatility crude oil refined products natural gas refinery feedstock prices company uses derivative commodity instruments manage exposure price volatility small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids chevrontexaco also uses derivative commodity instruments trading purposes results activity material company’s financial position net income cash flows company’s positions monitored managed daily basis risk control group ensure compliance company’s stated risk management policy approved company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures contracts traded new york mercantile exchange international petroleum exchange crude oil natural gas swap contracts options derivative products entered principally major financial institutions oil gas companies virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally market quotes independent thirdparty quotes aggregate effect hypothetical 15 percent change prices natural gas crude oil petroleum products would material company’s financial position net income cash flows hypothetical loss related commodity contracts estimated calculating cash value contracts difference hypothetical contract delivery prices multiplied contract amounts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect hypothetical adverse change 10 percent yearend exchange rates weakening us dollar would material company’s financial position net income cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income 2001 new swaps initiated connection debt fs9 issues year yearend 2001 weighted average maturity interest rate swaps approximately five years hypothetical 10 percent increase interest rates upon interest rate swaps would cause fair value “receive fixed” swaps decline “receive floating” swaps increase aggregate effect changes would material company’s financial position net income cash flows company’s 15 billion investment redeemable convertible preferred stock dynegy carried fair value transactions related parties chevrontexaco enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements united states longterm agreements place dynegy purchase substantially natural gas natural gas liquids produced legacy chevron united states excluding alaska supply natural gas natural gas liquids feedstocks company’s us refineries chemicals plants early 2002 company negotiating expand agreements include substantially legacy texaco us production natural gas natural gas liquids internationally longterm purchase agreements place company’s refining affiliate thailand management believes foregoing agreements others negotiated terms consistent would negotiated unrelated third party capital exploratory expenditures worldwide capital exploratory expenditures 2001 totaled 120 billionincluding company’s equity share affiliates’ expenditures capital exploratory expenditures 95 billion 2000 101 billion 1999 expenditures exploration production activities represented 59 percent total outlays 2001 compared 65 percent 2000 72 percent 1999 international exploration production spending 66 percent worldwide exploration production expenditures 2001 compared 62 percent 2000 75 percent 1999 reflecting company’s continuing focus international exploration production activities expenditures 2001 included additional investments tengizchevroil purchase 15 billion redeemable convertible preferred shares dynegy stock expenditures segment 2000 included additional investment approximately 300 million dynegy inc included 1999 expenditures 17 billion mainly cash assumption debt acquisition rutherfordmoran oil corporation petrolera argentina san jorge sa exploration production businesses thailand argentina respectively company estimates 2002 capital exploratory expenditures 94 billion including chevrontexaco’s share spending affiliates excluding 2001 amounts increased investment tengizchevroil dynegy redeemable convertible preferred stock spending years expected 9 percent lower 2002 61 billionor 65 percent total targeted exploration production activities 18 billion united states worldwide downstream spending estimated 17 billionand investments chemicals budgeted 400 million budgeted expenditures power related businesses 800 million remaining 400 million primarily targeted emerging technologies information technology infrastructure premerger employee termination benefits restructuring costs chevron recorded beforetax charges 235 million 1999 employee termination benefits restructuring costs part 3500employee reduction program operating segments across several business functions employees affected primarily usbased employee terminations completed december 2000 termination benefits approximately 3100 3500 employees paid assets chevron’s us canadian pension plans fourth quarter 1998 texaco recorded 115 million tax corporatewide reorganization affecting 1400 employees second quarter 1999 program expanded 1200 employees additional 48 million beforetax accrued end third quarter 2000 employee reductions met termination payments made first quarter 2000 texaco recorded 17 million tax termination additional 200 employees terminations payments completed end first quarter 2001 caltex recorded charges 37 million 1999 restructuring activities included severance termination benefits 23 million 200 employees december 2000 work force reductions separation payments completed environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner fs10 company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdparty owned wastedisposal sites used company obligation may arise operations closed sold nonchevrontexaco sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative andor remedial work meet current standards using definitions guidelines established american petroleum institute chevrontexaco estimated worldwide environmental spending 2001 1246 billion consolidated companies included expenditures 323 million environmental capital expenditures 923 million costs associated control abatement hazardous substances pollutants ongoing operations 2002 total worldwide environmental capital expenditures estimated 495 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites following table analyzes annual changes company’s beforetax environmental remediation reserves including superfund sites 2001 company recorded additional provisions estimated remediation costs refined products marketing sites various producing properties united states provisions superfund law environmental protection agency epa designated chevrontexaco potentially responsible party otherwise involved company remediation 413 hazardous waste sites company made provisions payments 2001 prior years approximately 287 sites single site expected result material liability company remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposures superfund law provides joint several liability responsible parties future actions epa regulatory agencies require chevrontexaco assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remediation reserves yearend 2001 2000 1999 superfund sites 62 million 73 million 79 million respectively likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties amount future costs may material company’s results operations period recognized company expect costs material adverse effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative petroleum chemicals companies company maintains additional reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives many costs related environmental issues expense provisions recognized unitofproduction basis reserves balance yearend 2001 22 billion included “accumulated depreciation depletion amortization” company’s consolidated balance sheet company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made litigation uncertainties chevron texaco four oil companies refiners filed suit 1995 contesting validity patent granted unocal corporation unocal reformulated gasoline chevrontexaco sells california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocal’s patent valid enforceable assessed damages 575 cents per gallon gasoline produced infringement patent may 2000 federal circuit court denied petition rehearing us court appeals federal circuit filed refiners case refiners petitioned us supreme court february 2001 supreme court denied petition review lower court’s ruling case remanded district court accounting infringing gasoline produced august 1 1996 september 30 2000 district court granted unocal’s motion summary judgment requesting accounting denied refiners’ motion stay proceedings vacate accounting order however judge presiding case recused entering final judgment new judge assigned additionally may 2001 us patent office uspo granted refiners’petition reexamine validity unocal’s patent february 2002 uspo ruled patent invalid unocal two months respond uspo ruling federal trade commission also announced investigating whether unocal’s failure disclose california air resources board filed patent application unfair competition may make unocal’s patent unenforceable fs11 unocal’s patent ultimately upheld enforceable company’s financial exposure includes royalties plus interest production gasoline proven infringed patent chevron texaco well texaco’s former affiliates equilon motiva accruing normal course business future estimated liability potential infringement patent covered trial court’s ruling 2000 chevron texaco made payments unocal totaling approximately 28 million original court ruling including interest fees unocal obtained additional patents alternate formulations could affect larger share us gasoline production chevrontexaco believes additional patents invalid unenforceable however patents ultimately upheld competitive financial effects company’s refining marketing operations presently indeterminable could material another issue involving company petroleum industry’s use methyl tertiarybutyl ether mtbe gasoline additive potential environmental impact seepage groundwater along oil companies company party lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future total costs company related lawsuits claims currently determinable chevrontexaco continues use mtbe gasoline sells certain areas state california directed mtbe phased manufacturing process end 2002 march 2002 governor california postponed phase mtbe california end 2003 company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold see “environmental matters” page fs10 comments related uncertainties connected environmental cost estimates financial exposures yearend 2001 projected benefit obligations exceeded value assets company’s combined us pension plans 780 million investment returns insufficient offset increases plan’s obligations pension expense may increase additional funding may required us federal income tax liabilities settled 1993 chevron caltex 1991 texaco california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range estimates exist possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability less 400 million time possible maximum net amount could owed chevrontexaco estimated 200 million timing settlement exact amount within range estimates uncertain areas company affiliates major operations include united states america canada australia united kingdom norway denmark kuwait republic congo angola nigeria chad equatorial guinea democratic republic congo indonesia papua new guinea china thailand venezuela argentina brazil colombia trinidad korea philippines singapore south africa company’s tengizchevroil affiliate operates kazakhstan company’s cpchem affiliate manufactures markets wide range petrochemicals plastics worldwide basis manufacturing facilities existence construction united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s dynegy affiliate operations united states canada united kingdom european countries chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant may take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods fs12 critical accounting policies december 2001 securities exchange commission sec issued statement addressing selection disclosure public companies “critical accounting policies practices” statement sec encouraged inclusion management’s discussion analysis mda commentary “the likelihood materially different reported results different assumptions conditions prevail” application critical accounting policies accompanying chevrontexaco consolidated financial statements supplementary information prepared accordance accounting principles generally accepted united states gaap significant accounting policies discussed note 1 consolidated financial statements inherent application many accounting policies need management make estimates judgments determination certain revenues expenses assets liabilities materially different financial results occur circumstances change additional information becomes known differences occurred past respect critical accounting policies follows successful efforts method oil gas accounting among things accounting principle requires capitalized costs producing properties amortized basis crude oil natural gas reserve quantities reserve estimates determined accordance earth science petroleum engineering principles practices vary result changes factors forecasted oil gas prices reservoir performance oil field technology downward revision reserve estimates field basis north america concession country producing areas result either higher depreciation depletion expense per barrel future periods b immediate writedown asset’s book value accordance accounting rules impairment properties latter condition would result downward revisions significant estimated future cash flows remaining reserves field insufficient recover unamortized capitalized costs conversely oil gas reserve quantities revised upward future perbarrel depreciation depletion expense would lower application successful efforts accounting also cause material fluctuations periods exploration expense drilling results different expected company changes exploration development plans determination exploratory drilling unsuccessful finding economically producible reserves requires immediate expensing previously capitalized drilling costs impairment longlived assets addition oil gas assets could become impaired application successful efforts accounting assets could become impaired require writedown circumstances warrant conditions could cause asset become impaired include lowerthanforecasted commodity sales prices changes company’s business plans significant adverse change local national business climate amount impairment charge would based estimates asset’s fair value compared book value environmental remediation litigation reserve estimation management also makes judgments estimates recording liabilities environmental cleanup litigation liabilities environmental remediation subject change matters changes laws regulations interpretation determination additional information extent nature site contamination improvements technology likewise actual litigation costs vary estimates based facts circumstance application laws individual cases income tax accounting computation company’s income tax expense requires interpretation complex tax laws regulations many taxing jurisdictions around world determination expected outcomes pending litigation assessment audit findings performed numerous taxing authorities actual income tax expense differ significantly management’s estimates assessment critical accounting policies meant allinclusive discussion uncertainties financial results occur application full range company’s accounting policies materially different financial results could occur application accounting policies well likewise materially different results occur upon adoption new accounting standards promulgated various rulemaking bodies contingencies discussed note 22 consolidated financial statements status pending litigation information included note 12 consolidated financial statements information contingencies litigation also addressed page fs11 new accounting standards company adopted financial accounting standards board fasb statement 133 “accounting derivative instruments hedging activities” fas 133 amended fas 138 “accounting certain derivative instruments certain hedging activities amendment fasb statement 133” effective january 1 2001 adoption fas 133 fas 138 significant impact company’s results operations financial position liquidity recent interpretations fas 133 fas 138 fasb derivatives implementation group prescribe marktomarket accounting certain natural gas sales contracts interpretations became effective january 1 2002 adoption time result material effect earnings effect subsequent changes contracts’ fair values uncertain september 2000 fasb issued statement 140 “accounting transfers servicing financial assets extinguishments liabilities replacement fasb statement 125” fas 140 fas 140 effective transfers occurring march 31 2001 disclosures relating securitization transactions collateral fiscal years ending december 15 2000 adoption fas 140 significant effect chevrontexaco’s accounting disclosures types transactions scope new standard june 2001 fasb issued statement 141 “business combinations” fas 141 statement 142 “goodwill intangible assets” fas 142 statement 143 fs13 “accounting asset retirement obligations” fas 143 fas 141 effective business combinations initiated june 30 2001 business combinations accounted using purchase method date acquisition july 1 2001 later fas 142 effective fiscal years beginning december 15 2001 except goodwill intangible assets acquired june 30 2001 immediately subject amortization nonamortization provisions statement fas 143 effective fiscal years beginning june 15 2002 adoption fas 141 effect company’s poolingofinterests method accounting texaco merger transaction affect future transactions similarly adoption fas 142 may affect future transactions expected effect company’s prior business combinations fas 143 differs several significant respects current accounting asset retirement obligations fas 19 “financial accounting reporting oil gas producing companies” adoption fas 143 affect future accounting reporting assets liabilities expenses related obligations magnitude effect yet determined august 2001 fasb issued statement 144 “accounting impairment disposal longlived assets” fas 144 fas 144 effective fiscal years beginning december 15 2001 initial application effective beginning fiscal year adopted adoption fas 144 affect assets classified held disposal result disposal activities initiated prior initial application may affect future disposals fs14 report independent accountants stockholders board directors chevrontexaco corporation opinion based audits report auditors consolidated financial statements listed index appearing item 14 a1 page 25 present fairly material respects financial position chevrontexaco corporation subsidiaries december 31 2001 2000 results operations cash flows three years period ended december 31 2001 conformity accounting principles generally accepted united states america addition based audits report auditors financial statement schedule listed index appearing item 14a2 page 25 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits consolidated financial statements give retroactive effect merger texaco inc october 9 2001 transaction accounted pooling interests described note 2 consolidated financial statements audit financial statements financial statement schedule texaco inc statements reflect total assets 30867 million december 31 2000 total revenues 51130 million 35691 million two years period ended december 31 2000 statements schedule audited auditors whose report thereon furnished us opinion expressed herein insofar relates amounts included texaco inc based solely report auditors conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion pricewaterhousecoopers llp san francisco california march 8 2002 report independent public accountants shareholders texaco inc audited consolidated balance sheet texaco inc delaware corporation subsidiary companies december 31 2000 1999 related consolidated statements income stockholders’ equity comprehensive income cash flows two years period ended december 31 2000 financial statements presented separately herein responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred presented separately herein present fairly material respects financial position texaco inc subsidiary companies december 31 2000 1999 results operations cash flows two years period ended december 31 2000 conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedule listed item 14 texaco inc’s 2000 form 10k presented separately herein responsibility company’s management presented purposes complying securities exchange commission’s rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp february 22 2001 new york new york fs15 consolidated statement income1 see accompanying notes consolidated financial statements report management stockholders chevrontexaco corporation management chevrontexaco responsible preparing accompanying financial statements ensuring integrity objectivity statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgments company’s statements audited pricewaterhousecoopers llp independent accountants selected audit committee approved stockholders management made available pricewaterhousecoopers llp company’s financial records related data well minutes stockholders’ directors’ meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance management’s authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy company’s internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management david j o’reilly david j o’reilly chairman board chief executive officer john watson john watson vice president chief financial officer stephen j crowe stephen j crowe vice president comptroller march 8 2002 fs16 consolidated statement comprehensive income see accompanying notes consolidated financial statements fs17 consolidated balance sheet see accompanying notes consolidated financial statements fs18 consolidated statement cash flows see accompanying notes consolidated financial statements fs19 consolidated statement stockholders’ equity fs20 consolidated statement stockholders’ equity continued see accompanying notes consolidated financial statements fs21 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies basis presentation merger chevron texaco october 9 2001 texaco inc texaco became wholly owned subsidiary chevron corporation chevron pursuant merger transaction chevron changed name chevrontexaco corporation combination accounted pooling interests consolidated financial statements give retroactive effect merger periods presented chevron texaco always combined certain reclassifications made conform separate presentations chevron texaco reclassifications impact amount net income stockholders’ equity consolidated financial statements include accounts majorityowned controlled subsidiaries elimination significant intercompany accounts transactions included consolidation accounts caltex group companies caltex joint venture owned 50 percent chevron texaco prior merger accounted equity method companies general chevrontexaco manages investments provides administrative financial management support us foreign subsidiaries affiliates engage fully integrated petroleum operations chemicals operations coal mining activities addition chevrontexaco holds investments power generation gasification businesses collectively companies operate approximately 180 countries petroleum operations consist exploring developing producing crude oil natural gas refining crude oil finished petroleum products marketing crude oil natural gas many products derived petroleum transporting crude oil natural gas petroleum products pipelines marine vessels motor equipment rail car chemicals operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lube oil additives preparing consolidated financial statements company follows accounting policies accordance accounting principles generally accepted united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method accordance accounting principles board apb opinion 18 “the equity method accounting investments common stock” accounting remaining unamortized cost increased decreased company’s share earnings losses dividends gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity recognized currently income deferred income taxes provided gains losses derivatives majority company’s activity commodity derivative instruments intended manage price risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company elected apply hedge accounting changes fair value contracts reflected current income company’s trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixed rate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income shortterm investments shortterm investments classified available sale highly liquid debt equity securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” shortterm investments markedtomarket unrealized gains losses included comprehensive income inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment successful efforts method used oil gas exploration production activities costs development wells related plant equipment proved mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending one following 1 decisions additional major capital expenditures 2 results additional fs22 note 1 summary significant accounting policies continued exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed determination whether proved reserves found cannot made within one year following completion drilling exploratory wells costs expensed longlived assets including proved oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows impaired assets written estimated fair values generally discounted future net beforetax cash flows proved oil gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession basis impairment amounts recorded incremental depreciation expense period event occurs depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales income expenditures maintenance repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based company’s commitment formal plan action approved remediation plan sale disposal asset company’s us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end property’s useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes company’s portion costs also company’s portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs using currently available technology applying current regulations well company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment stockholders’ equity revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevrontexaco interest producers generally recognized basis company’s net working interest entitlement method stock compensation company applies accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations accounting stock options presents note 21 pro forma net income earnings per share data accounting prescribed fas 123 “accounting stockbased compensation” applied note 2 texaco merger transaction following table presents summarized financial data combined company periods prior merger includes certain reclassification adjustments conform historic chevron presentation consolidation former equity operations intercompany eliminations represents loss associated sale company’s interest equilon motiva fs23 notes consolidated financial statements millions dollars except pershare amounts note 2 texaco merger transaction continued time merger share texaco common stock converted taxfree basis right receive 077 shares chevrontexaco common stock approximately 425 million additional shares common stock issued representing 40 percent outstanding chevrontexaco common stock merger condition approving merger us federal trade commission ftc required divestment certain texaco assets texaco’s investments us refining marketing transportation affiliates equilon enterprises llc equilon motiva enterprises llc motiva well interests us natural gas processing transportation facilities general aviation fuel marketing also time merger texaco placed interests equilon motiva trust required ftc company longer exercised significant influence investments associated accounting method changed equity cost basis note 3 extraordinary item net income 2001 included loss 643 net tax benefit 144 061 per common share diluted related disposition assets required condition ftc approval merger assets made duplicative merger aftertax loss dispositions reported extraordinary item accordance poolingofinterests accounting requirements included total aftertax loss 564 connected sale interests equilon motiva proceeds sale closed february 2002 approximately 2200 assets sold order ftc assets disposed made duplicative merger total net book value yearend 2001 2181 amount included “current assets” consolidated balance sheet “assets held sale merger related” net income 2001 associated assets sold result merger approximately 375 note 4 employee termination benefits restructuring costs company recorded beforetax charges 1563 2001 mergerrelated expenses included employee severance benefits incremental pension medical plan costs associated work force reductions legal accounting sec filing investment banker fees employee office relocations costs elimination redundant facilities operations included 2001 charges accruals 891 employee termination benefits approximately 4500 employees mergerrelated expenses would benefit future periods payments accruals year 105 approximately 1400 employees terminated yearend accrual balance 786 expected mostly extinguished early 2003 certain terminating employees eligible delay separation payments one year yearend 2001 approximately 275 accrual balance classified long term accrual balances premerger restructuring costs extinguished end 2001 note 5 special items merger effects financial information net income affected transactions unrelated necessarily representative company’s ongoing operations periods presented transactions defined management designated “special items merger effects extraordinary items” obscure underlying results operations year well affect comparability results years listed following table categories items net increase decrease net income related tax effects fs24 note 5 special items merger effects financial information continued accordance policy company recorded impairments assets held used changes circumstances primarily related lower oil gas prices downward revisions reserves changes use assets indicated carrying values assets could recovered estimated future beforetax undiscounted cash flows 2001 included 1022 impairment midway sunset field california result writedown proved oil reserve quantities upon determination lowerthanprojected oil recovery field’s steam injection process also 247 impairment ll652 field venezuela 2001 slowerthanexpected reservoir repressurization resulted reduction projected volumes oil recoverable company’s remaining contract period operation asset impairments included “asset writeoffs revaluations” assets held use except us coal assets 1999 late 1999 assets reclassified “held use” upon cessation negotiations potential buyers aggregate income statement effects special items reflected following table including chevrontexaco’s proportionate share special items related equity affiliates financial information follows excess market value carrying value inventories lifo method used 1580 2339 1169 december 31 2001 2000 1999 respectively market value generally based average acquisition costs year 2000 certain inventories recorded market lower lifo carrying value adjustments market reduced net income 4 2000 2001 1999 market valuation adjustment reserves established prior years eliminated market prices improved associated physical units inventory sold elimination reserves increased net income 4 170 2001 1999 respectively note 6 information relating consolidated statement cash flows “net decrease operating working capital” composed following major components “capital expenditures” reconciliation amount capital exploratory expenditures excluding equity affiliates presented mda detailed following table fs25 notes consolidated financial statements millions dollars except pershare amounts note 6 information relating consolidated statement cash flows continued 2001 net noncash reclassification 63 includes 1500 investment dynegy preferred stock includes liabilities assumed acquisitions rutherfordmoran oil corporation petrolera argentina san jorge sa represents deferred payment related 1993 acquisition interest tengizchevroil joint venture includes obligations assumed acquisition rutherfordmoran oil corporation capital lease additions consolidated statement cash flows excludes following significant noncash transaction 2000 chevron contributed 2800 net noncash assets chevron phillips chemical company llc cpchem investment accounted equity method note 7 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevrontexaco corporation cusa owns manages operates behalf chevrontexaco subsidiaries us integrated petroleum operations excluding chevrontexaco’s investments equilon motiva sold february 2002 pipeline operations chevrontexaco cusa subsidiaries affiliates manage operate chevrontexaco’s us businesses assets related exploration production crude oil natural gas natural gas liquids also associated refining marketing supply distribution products derived petroleum natural gas liquids cusa also holds chevrontexaco’s investment cpchem summarized financial information cusa consolidated subsidiaries presented note 8 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda islands indirect wholly owned subsidiary chevrontexaco corporation ctc principal operator chevrontexaco’s international tanker fleet engaged marine transportation oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevrontexaco companies chevrontexaco corporation guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented follows restrictions ctc’s ability pay dividends make loans advances december 31 2001 note 9 stockholders’ equity retained earnings december 31 2001 2000 included approximately 2001 2300 respectively company’s share undistributed earnings equity affiliates interests equilon motiva placed trust time merger chevrontexaco longer significant influence joint ventures accordingly method accounting investments changed fourth quarter 2001 equity cost basis upon merger chevron texaco authorized common stock chevrontexaco increased 2 billion shares 075 par value 4 billion shares 075 par value terms merger agreement approximately 425 million shares chevrontexaco common stock issued exchange outstanding shares texaco common stock based upon exchange ratio 077 chevrontexaco share texaco fs26 note 9 stockholders’ equity continued share texaco’s common stock held treasury canceled effective time merger 1998 connection renewal chevron’s stockholder rights plan chevron declared dividend distribution outstanding share common stock one right purchase participating preferred stock since distribution 1998 newly issued shares corporation’s common stock accompanied preferred stock purchase right including shares issued connection merger chevron texaco following merger chevron stockholder rights plan continued stockholder rights plan chevrontexaco rights issued plan become exercisable unless redeemed earlier chevrontexaco person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result person group acquiring 10 percent outstanding shares common stock either event occurring without prior consent chevrontexaco series participating preferred stock holder right entitled receive purchase price payable upon exercise chevrontexaco right subject adjustment person group acquired 10 percent outstanding shares common stock without prior consent chevrontexaco would entitled purchase rights expire november 2008 may redeemed company 1 cent per right prior date rights voting dividend rights become exercisable dilutive effect earnings per share company five million shares company’s preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 2001 made rights exercisable 1989 texaco established similar stockholder rights plan reserved designated 3 million shares series issuance upon exercise rights prior merger rights exercisable become exercisable upon merger immediately merger texaco rights series junior participating preferred stock delisted texaco stockholder rights plan terminated 2000 june 2001 1200 shares texaco cumulative variable rate preferred stock called market auction preferred shares maps outstanding aggregate value 300 maps redeemed june 2001 liquidation preference 250000 per share plus premium accrued unpaid dividends december 31 2001 30 million shares chevrontexaco’s authorized unissued common stock reserved issuance chevrontexaco corporation longterm incentive plan ltip approved stockholders 1990 date plan’s common stock requirements met company’s treasury stock issuances reserved shares note 10 financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related price volatility crude oil refined products natural gas refinery feedstock company uses derivative commodity instruments manage exposure small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixed price contracts sell natural gas natural gas liquids company also uses derivative commodity instruments limited trading purposes company maintains policy requiring international swaps derivatives association master agreement govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transaction bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable master netting agreement counterparty “net” marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk company’s policy use master netting agreements counterparties conducts significant transactions fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income fs27 notes consolidated financial statements millions dollars except pershare amounts note 10 financial derivative instruments continued 2001 new swaps initiated connection debt issues year yearend 2001 weighted average maturity interest rate swaps approximately five years fair values interest rate swaps reported consolidated balance sheet “accounts notes receivables” “accounts payable” gains losses reported directly income part “interest debt expense” activities reported “operating activities” consolidated statement cash flows concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit negotiated contracts financial strength customer considered sufficient principal securities obtained support lines credit fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 6599 8870 estimated fair values 7097 8991 december 31 2001 2000 respectively company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 2449 2543 december 31 2001 2000 respectively balances 1446 1630 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately 36 years company’s 1500 investment redeemable convertible preferred stock dynegy affiliate carried fair value note 11 operating segments geographic data chevrontexaco separately manages exploration production refining marketing transportation chemicals businesses company’s primary country operation united states country domicile remainder company’s operations reported international outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments instead operating segments billed direct corporate services nonbillable costs merger effects remain corporate expenses aftertax segment income loss presented following table segment assets segment assets include intercompany investments intercompany receivables “all other” assets consist primarily worldwide cash marketable securities real estate information systems investment dynegy inc coal mining operations power gasification operations technology investments mergerrelated assets held sale yearend 2001 segment assets yearend 2001 2000 follow fs28 note 11 operating segments geographic data continued segment sales operating revenues exploration production segment derived primarily production crude oil natural gas revenues refining marketing transportation segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products prior july 2000 formation cpchem chemicals segment revenues derived manufacture sale petrochemicals plastic resins lube oil fuel additives subsequent formation joint venture revenues manufacture sale lube oil fuel additives included “all other” activities include corporate administrative costs worldwide cash management debt financing activities coal mining operations power gasification operations technology investments insurance operations real estate activities united states country chevrontexaco generates significant revenues united kingdom amounted 10350 12101 9650 2001 2000 1999 respectively sales revenues based origin sale reportable operating segment “sales operating revenues” including internal transfers years 2001 2000 1999 presented following table sales transfer products segments prices approximate market prices segment income taxes segment income tax expenses years 2001 2000 1999 follows fs29 notes consolidated financial statements millions dollars except pershare amounts note 11 operating segments geographic data continued segment information additional information segmentation major equity affiliates contained note 14 information related properties plant equipment segment contained note 15 note 12 litigation chevron texaco four oil companies refiners filed suit 1995 contesting validity patent granted unocal corporation unocal reformulated gasoline chevrontexaco sells california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocal’s patent valid enforceable assessed damages 575 cents per gallon gasoline produced infringement patent may 2000 federal circuit court denied petition rehearing us court appeals federal circuit filed refiners case refiners petitioned us supreme court february 2001 supreme court denied petition review lower court’s ruling case remanded district court accounting infringing gasoline produced august 1 1996 september 30 2000 district court granted unocal’s motion summary judgment requesting accounting denied refiners’ motion stay proceedings vacate accounting order however judge presiding case recused entering final judgment new judge assigned additionally may 2001 us patent office uspo granted refiners’ petition reexamine validity unocal’s patent february 2002 uspo ruled patent invalid unocal two months respond uspo ruling federal trade commission also announced investigating whether unocal’s failure disclose california air resources board filed patent application unfair competition may make unocal’s patent unenforceable unocal’s patent ultimately upheld enforceable company’s financial exposure includes royalties plus interest production gasoline proved infringed patent chevron texaco well texaco’s former affiliates equilon motiva accruing normal course business future estimated liability potential infringement patent covered trial court’s ruling 2000 chevron texaco made payments unocal totaling approximately 28 original court ruling including interest fees unocal obtained additional patents alternate formulations could affect larger share us gasoline production chevrontexaco believes additional patents invalid unenforceable however patents ultimately upheld competitive financial effects company’s refining marketing operations presently indeterminable could material another issue involving company petroleum industry’s use methyl tertiarybutyl ether mtbe gasoline additive potential environmental impact seepage groundwater along oil companies company party lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future costs company related lawsuits claims currently determinable chevrontexaco continues use mtbe gasoline sells certain areas state california directed mtbe phased manufacturing process end 2002 note 13 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2001 2000 1999 follows fs30 note 13 lease commitments continued contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2001 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 14 investments advances descriptions major affiliates 2001 follows tengizchevroil tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period chevron’s ownership 45 percent 1999 2000 january 2001 company purchased additional 5 percent interest upon formation joint venture company incurred obligation 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tco’s production capacity part january transaction company paid 210 420 obligation 420 also included carrying value original investment company believed beyond reasonable doubt full payment would made equilon enterprises llc effective january 1 1998 texaco shell oil company shell formed equilon delaware limited liability company equilon joint venture combined major elements companies’ western midwestern us refining marketing businesses nationwide trading transportation lubricants businesses company’s 44 percent ownership interest equilon placed trust october 9 2001 required ftc trust completed disposition company’s investment equilon february 2002 equilon limited liability company chevrontexaco recorded provision income taxes related income tax liability applicable share venture’s income separately consolidated financial statements see note 2 additional information equilon motiva enterprises llc effective july 1 1998 texaco shell saudi refining inc corporate affiliate saudi aramco formed motiva delaware limited liability company motiva joint venture combined east gulf coast us refining marketing businesses shell star enterprise star turn joint venture owned 50 percent texaco saudi refining inc terms limited liability company agreement motiva ownership motiva subject annual adjustment yearend 2005 based performance assets contributed motiva accordingly company’s initial 325 percent ownership motiva adjusted effective january 1 2000 31 percent january 1 2001 company’s ownership percentage adjusted 35 percent company’s ownership interest motiva placed trust october 9 2001 required ftc trust completed disposition company’s investment motiva february 2002 motiva limited liability company chevrontexaco recorded provision income taxes related income tax liability applicable share venture’s income separately consolidated financial statements see note 2 additional information motiva lgcaltex corporation chevrontexaco owns 50 percent lgcaltex joint venture formed 1967 lg group caltex originally incorporated honam oil refinery company limited engage importing refining marketing petroleum products korea star petroleum refining company ltd chevrontexaco 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery ta phut thailand thai national petroleum company owns remaining 36 percent sprc caltex australia ltd chevrontexaco 50 percent equity ownership interest caltex australia limited largest oil company australia remaining 50 percent caltex australia publicly owned chevron phillips chemical company llc chevrontexaco owns 50 percent cpchem formed july 2000 chevron merged petrochemicals businesses phillips petroleum company cpchem limited liability company chevrontexaco records provision income taxes related tax liability applicable share venture’s income separately consolidated financial statements fs31 notes consolidated financial statements millions dollars except pershare amounts note 14 investments advances continued dynegy inc dynegy gatherer processor transporter marketer energy products north america united kingdom products include natural gas natural gas liquids crude oil electricity 2001 chevrontexaco exercised preemptive rights acquired 12 million shares dynegy’s common stock 408 additional investment maintained company’s equity ownership dynegy approximately 265 percent also 2001 chevrontexaco invested 1500 dynegy redeemable convertible preferred stock market value chevrontexaco’s share dynegy common stock december 31 2001 2206 based equivalent closing market prices fair value redeemable convertible preferred stock 1500 “sales operating revenues” consolidated statement income include 13868 15741 10068 major affiliated companies 2001 2000 1999 “purchased crude oil products” include 3859 4824 2837 major affiliated companies 2001 2000 1999 “accounts notes receivable” consolidated balance sheet include 481 1392 due affiliated companies december 31 2001 2000 respectively “accounts payable” include 168 313 due major affiliated companies december 31 2001 2000 respectively 2001 amounts exclude balances equilon motiva equity earnings together investments advances companies accounted using equity method investments accounted cost follows placed trust time merger accounting changed equity method cost basis interests classified “assets held sale merger related” december 31 2001 fs32 note 14 investments advances continued following table provides summarized financial information 100 percent basis equilon motiva equity affiliates well chevrontexaco’s total share additional columns continued table first columns repeated accounted equity method premerger cost basis postmerger note 15 properties plant equipment1 additional columns continued table first columns repeated fs33 notes consolidated financial statements millions dollars except pershare amounts note 16 taxes table include current us tax benefit 2 us deferred tax benefit 142 associated extraordinary item 2001 beforetax income including related corporate charges us operations 1778 compared 5823 2000 1738 1999 international operations beforetax income 6513 8226 4074 2001 2000 1999 respectively us federal income tax expense reduced 202 165 156 2001 2000 1999 respectively business tax credits company’s effective income tax rate varied us statutory federal income tax rate following increase 2001 effective tax rate primarily due us beforetax income generally subject lower tax rate significantly smaller percentage overall beforetax income 2001 compared 2000 decline us beforetax income arose primarily substantially 2001 mergerrelated expenses associated operations united states company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences expected realized december 31 2001 2000 deferred taxes classified consolidated balance sheet follows company’s policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 9003 december 31 2001 substantially amount represents earnings reinvested part company’s ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability fs34 note 16 taxes continued taxes income follows note 17 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 10 information concerning company’s debtrelated derivative activities utilized lines credit available shortterm financing totaled 210 december 31 2001 december 31 2001 company 3200 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate reserve adjusted domestic certificate deposit rate bank prime rate amounts outstanding credit agreements 2001 yearend december 31 2001 2000 company classified 3200 5143 respectively shortterm debt longterm settlement obligations expected require use working capital 2002 company intent ability refinance debt longterm basis note 18 longterm debt chevrontexaco three “shelf” registrations file securities exchange commission together would permit issuance 2800 debt securities pursuant rule 415 securities act 1933 consolidated longterm debt maturing december 31 2001 follows 2002 1095 2003 536 2004 857 2005 570 2006 195 2006 3346 see note 10 information concerning company’s debtrelated derivative activities fs35 notes consolidated financial statements millions dollars except pershare amounts note 19 new accounting standards company adopted financial accounting standards board fasb statement 133 “accounting derivative instruments hedging activities” fas 133 amended fas 138 “accounting certain derivative instruments certain hedging activities amendment fasb statement 133” effective january 1 2001 adoption fas 133 fas 138 significant impact company’s results operations financial position liquidity recent interpretations fas 133 fas 138 fasb derivatives implementation group prescribe marktomarket accounting certain natural gas sales contracts interpretations became effective january 1 2002 adoption time result material effect earnings effect subsequent changes contracts’ fair values uncertain september 2000 fasb issued statement 140 “accounting transfers servicing financial assets extinguishments liabilities replacement fasb statement 125” fas 140 fas 140 effective transfers occurring march 31 2001 disclosures relating securitization transactions collateral fiscal years ending december 15 2000 adoption fas 140 significant effect chevrontexaco’s accounting disclosures types transactions scope new standard june 2001 fasb issued statement 141 “business combinations” fas 141 statement 142 “goodwill intangible assets” fas 142 statement 143 “accounting asset retirement obligations” fas 143 fas 141 effective business combinations initiated june 30 2001 business combinations accounted using purchase method date acquisition july 1 2001 later fas 142 effective fiscal years beginning december 15 2001 except goodwill intangible assets acquired june 30 2001 immediately subject amortization nonamortization provisions statement fas 143 effective fiscal years beginning june 15 2002 adoption fas 141 effect company’s poolingofinterests method accounting texaco merger transaction affect future transactions similarly adoption fas 142 may affect future transactions expected effect company’s prior business combinations fas 143 differs several significant respects current accounting asset retirements obligations fas 19 “financial accounting reporting oil gas producing companies” adoption fas 143 affect future accounting reporting assets liabilities expenses related obligations magnitude effect yet determined august 2001 fasb issued statement 144 “accounting impairment disposal longlived assets” fas 144 fas 144 effective fiscal years beginning december 15 2001 initial application effective beginning fiscal year adopted adoption fas 144 affect assets classified held disposal result disposal activities initiated prior initial application may affect future disposals note 20 employee benefit plans pension plans postretirement benefits company defined benefit pension plans employees provides certain health care life insurance plans active qualifying retired employees pension plans company required satisfy employee retirement income security act minimum funding standard company’s annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience unfunded pension postretirement benefits paid directly incurred accordingly payments reflected changes plan assets following table status company’s pension plans postretirement benefit plans 2001 2000 follows fs36 note 20 employee benefit plans continued fs37 notes consolidated financial statements millions dollars except pershare amounts note 20 employee benefit plans continued components net periodic benefit cost 2001 2000 1999 primarily relates special involuntary termination enhancement pension postretirement benefits texaco changeincontrol program 2001 special involuntary termination enhancement pension benefits 1999 chevron companywide restructuring program projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 2496 2187 1269 respectively december 31 2001 850 737 33 respectively december 31 2000 postretirement benefit measurement purposes one set health care costtrend rates used preage 65 postage 65 retirees starting 2002 approximately 11 percent cost increase previous year trend rates gradually drop ultimate rate 45 percent 5 years onepercentagepoint change assumed health care costtrend rates would following effects profit sharingsavings plan eligible employees chevrontexaco certain subsidiaries participate either chevron profit sharingsavings plan employees thrift plan texaco charges expense plans 157 63 64 2001 2000 1999 respectively employee stock ownership plans esop december 1989 chevron established leveraged esop part profit sharingsavings plan esop provides partial prefunding company’s future commitments profit sharing savings plan result annual income tax savings company 1988 texaco established leveraged esop part employees thrift plan texaco inc thrift plan esop loan satisfied december 2000 esop designed provide participants benefit approximately 6 percent base pay permitted american institute certified public accountants aicpa statement position 936 “employers’ accounting employee stock ownership plans” company elected continue practices based statement position 763 “accounting practices certain employee stock ownership plans” subsequent consensus emerging issues task force financial accounting standards board debt esops recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal esop debt principal repayments less dividends received esops interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations expense recorded esops 75 26 62 2001 2000 1999 respectively including 62 48 51 interest expense related esop debt dividends paid esop shares held used service esop debt dividends used 86 77 63 2001 2000 1999 respectively company made esop contributions 75 1 67 2001 2000 1999 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service charge credit compensation expense 13 22 11 2001 2000 1999 respectively esop shares fs38 note 20 employee benefit plans continued december 31 2001 2000 follows benefit plan trust texaco established benefit plan trust funding obligations benefit plans yearend 2001 trust contained 71 million shares chevrontexaco treasury stock company intends continue pay obligations benefit plans trust use shares proceeds sale shares dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations management incentive plans chevron two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility plans expanded include former employees texaco caltex mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants texaco also cash incentive program stock incentive plan sip included stock options restricted stock incentive awards executives directors key employees awards caltex ltip form performance units stock appreciation rights charges expense combined management incentive plans excluding expense related ltip sip stock options restricted stock awards discussed note 21 93 83 54 2001 2000 1999 respectively incentive plans chevron program provided eligible employees annual cash bonus company achieved certain financial safety goals program expanded include former employees texaco caltex postmerger texaco caltex also similar programs charges combined programs 154 230 60 2001 2000 1999 respectively note 21 stock options company applies apb opinion 25 related interpretations accounting stockbased compensation programs described stockbased compensation expense recognized connection programs 111 23 21 2001 2000 1999 respectively compensation cost company’s combined stock options determined based fair market value grant dates awards consistent methodology prescribed fas 123 net income earnings per share 2001 2000 1999 would pro forma amounts shown following table effects applying fas 123 pro forma disclosure indicative future amounts fas 123 apply awards granted prior 1995 addition certain options vest several years awards future years whose terms conditions may vary anticipated broadbased employee stock options 1996 chevron granted eligible employees option 150 shares stock equivalents exercise price 51875 per share addition portion awards granted ltip terms similar broadbased employee stock options vested june 1997 options 7204800 shares including similartermed ltip awards granted program 1996 program expired 1999 1998 chevron announced another broadbased employee stock option program granted eligible employees option varied 100 300 shares stock equivalents dependent employee’s salary job grade options vested two years february 2000 options 4820800 shares awarded exercise price 763125 per share outstanding option shares 3064367 yearend 2000 2001 exercises 653096 forfeitures 44960 reduced outstanding option shares 2366311 end year options expire february 11 2008 company recorded expenses 1 2 4 options 2001 2000 1999 respectively fair value option share 1998 program date grant fas 123 estimated 1908 using average results blackscholes models preceding 10 years 10year averages assumption used blackscholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent longterm incentive plan stock options granted ltip generally awarded market price date grant exercisable earlier one year later 10 years date grant however portion ltip options granted 1996 terms similar broadbased employee stock options maximum number shares may granted year 1 percent total outstanding shares common stock january 1 year texaco stock incentive plan sip maximum number shares granted stock options restricted stock 1 percent common stock outstanding december 31 previous year restricted shares granted sip fs39 notes consolidated financial statements millions dollars except pershare amounts note 21 stock options continued contained performance element satisfied order specified portion shares vest upon merger restricted shares became vested converted chevrontexaco shares merger exchange ratio 077 restricted performance shares awarded year sip converted basis follows stock options granted sip extend 10 years date grant vest twoyear period rate 50 percent first year 50 percent second year exercise price cannot less fair market value underlying shares common stock date grant plan provides restored options feature enables participant exercises stock option exchanging previously acquired common stock shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price fair market value common stock day restored option granted amounts charged compensation expense 2001 2000 1999 110 25 19 fair market value stock option granted estimated date grant fas 123 using blackscholes optionpricing model following weightedaverage assumptions blackscholes weightedaverage fair value chevron options granted 2001 2000 1999 2045 2234 2040 per share respectively weightedaverage fair value texaco options granted 2001 2000 1999 1290 1156 1121 per share upon merger outstanding texaco stock options converted chevrontexaco options merger exchange rate 077 following table presents combined stock options outstanding december 31 2001 2000 1999 information texaco’s stock options converted basis table excludes chevron ltip awards granted terms similar broadbased employee stock options following table summarizes information stock options outstanding december 31 2001 note 22 contingencies commitments us federal income tax liabilities settled 1993 chevron caltex 1991 texaco company’s california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes open years december 31 2001 company subsidiaries direct indirect guarantors contingent liabilities 1118 notes affiliated companies 742 notes others following february 2002 disposition interests fs40 note 22 contingencies commitments continued equilon motiva contingent liabilities notes affiliated companies reduced 432 company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements aggregate amounts required payments various commitments 2002 1370 2003 1402 2004 1302 2005 1179 2006 1094 2007 1311 total payments agreements 1509 2001 1506 2000 1165 1999 company commitments related preferred shares subsidiary companies accounted minority interest mvp production inc subsidiary variable rate cumulative preferred shares 75 owned one minority holder shares voting redeemable 2003 dividends shares 4 2001 2000 1999 texaco capital llc wholly owned finance subsidiary issued 65 deferred preferred shares series c dividends amounting 59 series c rate 717 percent compounded annually paid redemption date february 28 2005 unless earlier redemption occurs early redemption may result upon occurrence certain specific events chevrontexaco provided certain indemnities contingent liabilities equilon motiva shell oil saudi refining inc part agreement sale company’s interests investments generally indemnities provided limited contingent liabilities may become actual liabilities within 18 months sale company’s interests reduced reserves established prior sale excluding environmental liabilities company’s financial exposure related indemnities limited 300 additionally company provided indemnities certain environmental liabilities arising conditions existed prior formation equilon motiva periods chevrontexaco’s ownership interest entities well customary representations warranties within agreements company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemicals concerns chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps however results operations financial position certain equity affiliates may affected business activities involving use derivative instruments company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability less 400 time possible maximum net amount could owed chevrontexaco estimated 200 timing settlement exact amount within range estimates uncertain areas company affiliates significant operations include united states america canada australia united kingdom norway denmark kuwait republic congo angola nigeria chad equatorial guinea democratic republic congo south africa indonesia papua new guinea philippines singapore china thailand venezuela argentina brazil colombia trinidad korea company’s tengizchevroil affiliate operates kazakhstan company’s chevron phillips chemical company llc affiliate manufactures markets wide range petrochemicals plastics worldwide basis manufacturing facilities existence construction united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s dynegy affiliate operations united states canada united kingdom european countries fs41 notes consolidated financial statements millions dollars except pershare amounts note 23 earnings per share eps basic eps includes effects deferrals salary compensation awards invested chevrontexaco stock units certain officers employees company based upon net income less preferred stock dividend requirements diluted eps includes effects deferrals well dilutive effects outstanding stock options awarded company’s stock option programs see note 21 “stock options” following table sets forth computation basic diluted eps fs42 quarterly results stock market data accordance poolingofinterests accounting quarterly results preceding table give retroactive effect merger periods presented chevron texaco always combined company’s common stock listed new york stock exchange trading symbol cvx pacific exchange march 8 2002 stockholders record numbered approximately 250000 october 9 2001 common stock traded name chevron corporation trading symbol chv restrictions company’s ability pay dividends fs43 fiveyear financial summary chevron dividend premerger supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 “disclosures oil gas producing activities” fas 69 section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad congo democratic republic congo asiapacific geographic area includes activities principally australia china indonesia kazakhstan kuwait papua new guinea philippines thailand “other” geographic category includes activities united kingdom canada denmark netherlands norway trinidad colombia venezuela brazil argentina countries amounts shown affiliated companies chevrontexaco’s 50 percent equity share tengizchevroil tco exploration production partnership operating republic kazakhstan 30 percent equity share hamaca exploration production partnership operating venezuela beginning 2000 company increased ownership tco 45 percent 50 percent january 2001 fs44 table costs incurred exploration property acquisitions development1 includes costs incurred whether capitalized expensed excludes support equipment expenditures includes acquisition costs additional 5 percent interest 2001 proved amounts include wells equipment facilities associated proved reserves include properties acquired property exchanges includes acquisition costs related deferred income taxes purchases rutherfordmoran oil corporation petrolera argentina san jorge sa fs45 supplemental information oil gas producing activities continued unaudited table ii capitalized costs related oil gas producing activities existing costs transferred consolidated subsidiary affiliate yearend 2000 previously reported consolidated companies fs46 table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2001 2000 1999 shown following table net income exploration production activities reported page fs5 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs5 value owned production consumed fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations includes gas processing fees net sulfur income foreign currency transaction gains losses certain significant impairment writedowns miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified management’s discussion analysis pages fs5 fs6 fs47 supplemental information oil gas producing activities continued unaudited table iv results operations oil gas producing activities unit prices costs12 value owned production consumed fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted crude oilequivalent gas oeg barrels rate 6 mcf1 oeg barrel table v reserve quantity information company’s estimated net proved underground oil gas reserves changes thereto years 2001 2000 1999 shown following table proved reserves estimated company asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually company’s reserves advisory committee ensure rigorous professional standards reserves definitions prescribed us securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves include additional quantities recoverable beyond term lease concession agreement may result extensions currently proved areas applying secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods “net” reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate fs48 table v reserve quantity information continued chevrontexaco operates risked service agreement venezuela’s block ll652 located northeast section lake maracaibo chevrontexaco accounting ll652 oil gas activity december 31 2001 recorded 18 million barrels proved crude oil reserves reserve quantities recorded company’s service agreements boscan field venezuela longterm purchase agreement associated service agreement chuchupa field colombia period 2005 2016 additional columns continued table first columns repeated includes reserves acquired property exchanges includes reserves disposed property exchanges information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevrontexaco significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevrontexaco views reserves development integral part total upstream operations however us securities exchange commission regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 186 million barrels december 31 2001 production expected begin late 2002 oil sands reserves considered standardized measure discounted cash flows conventional oil gas reserves found page fs50 fs49 supplemental information oil gas producing activities continued unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves fs50 table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs51 exhibit index e1 exhibit index continued filed herewith october 9 2001 company changed name chevron corporation chevrontexaco corporation filings securities exchange commission prior date may found company’s former name copies exhibits contained herein available fee 2 per document security holder upon written request secretary’s department chevrontexaco corporation 575 market street san francisco california 94105 e2item 14 controls procedures evaluation disclosure controls procedures chevrontexaco corporation’s chief executive officer chief financial officer evaluating effectiveness company’s disclosure controls procedures defined rules 13a14c 15d14c securities exchange act 1934 “exchange act” date “evaluation date” within 90 days prior filing date annual report concluded evaluation date company’s disclosure controls procedures adequate designed ensure material information relating company consolidated subsidiaries required included company’s periodic filings exchange act would made known others within entities b changes internal controls since evaluation date significant changes company’s internal controls factors could significantly affect company’s disclosure controls procedures significant deficiencies material weaknesses disclosure controls procedures requiring corrective actions part iv item 15item 14 principal auditor fees services information appearing headings “ratification independent auditors principal auditor fees services” “ratification independent auditors preapproval policies procedures” notice 2004 annual meeting stockholders 2004 proxy statement filed pursuant rule 14a6b exchange act connection company’s 2004 annual meeting stockholders incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information appearing headings “ratification independent registered public accounting firm principal accountant fees services” “ratification independent registered public accounting firm audit committee preapproval policies procedures” notice 2005 annual meeting stockholders 2005 proxy statement filed pursuant rule 14a6b exchange act connection company’s 2005 annual meeting stockholders incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information appearing headings “ratification independent registered public accounting firm principal accountant fees services” “ratification independent registered public accounting firm audit committee preapproval policies procedures” notice 2006 annual meeting stockholders 2006 proxy statement filed pursuant rule 14a6b exchange act connection company’s 2006 annual meeting stockholders incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information appearing headings “ratification independent registered public accounting firm principal accountant fees services” “ratification independent registered public accounting firm audit committee preapproval policies procedures” 2007 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information appearing heading “ratification independent registered public accounting firm” 2008 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “ratification independent registered public accounting firm” 2009 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “proposal ratify independent registered public accounting firm” 2010 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “proposal ratify appointment independent registered public accounting firm” 2012 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “proposal ratify appointment independent registered public accounting firm” 2013 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify appointment independent registered public accounting firm” 2014 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify appointment independent registered public accounting firm” 2015 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify pricewaterhousecoopers llp independent auditor 2016 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify pricewaterhousecoopers llp independent registered public accounting firm 2017 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify pricewaterhousecoopers llp independent registered public accounting firm 2019” 2019 proxy statement incorporated reference annual report form 10k page intentionally left blank financial table contents managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page 32 discussion financial results major operating area three years ended december 31 2018 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil canada china colombia denmark indonesia kazakhstan myanmar nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south korea thailand united kingdom united states venezuela earnings company depend mostly profitability upstream business segment significant factor affecting results operations upstream segment price crude oil determined global markets outside company’s control companys downstream business crude oil largest cost component refined products companys objective deliver competitive results stockholder value business environment periods sustained lower prices could result impairment writeoff specific assets future periods cause company adjust operating expenses capital exploratory expenditures along measures intended improve financial performance effective tax rate company change substantially periods significant earnings volatility due mix effects impacted absolute level earnings losses whether arise higher lower tax rate jurisdictions result decline increase effective income tax rate one period may indicative expected results future periods note 16 provides company’s effective income tax rate last three years refer cautionary statement relevant forwardlooking information page 2 risk factors part item 1a pages 18 21 discussion inherent risks could materially impact companys results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance value growth asset dispositions restructurings may result significant gains losses future periods companys asset sale program 2018 2020 targeting beforetax proceeds 510 billion proceeds related asset sales 20 billion 2018 managements discussion analysis financial condition results operations company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry production inventory levels technology advancements production quotas actions imposed organization petroleum exporting countries opec producers actions regulators weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax applicable laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control including among things general level inflation tariffs taxes imposed goods services commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services modest cost pressures continue rigrelated services across north america unconventional markets cost pressures softened well completion activity particularly permian basin expected rise pipeline takeaway constraints resolved late 2019 international offshore markets showing indications increased activity levels limited cost pressures date capital exploratory expenditures operating expenses could also affected damage production facilities caused severe weather civil unrest delays construction factors chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas majority company’s equity crude production priced based brent benchmark brent price averaged 71 per barrel fullyear 2018 compared 54 2017 crude oil prices increased throughout first three quarters 2018 due solid demand combined opec production cuts late year continued us shale growth combined unexpected shortterm waivers iranian sanctions granted several countries led excess supply conditions resulting decrease oil prices response opec agreed new production cuts early december midfebruary 2019 brent price 64 per barrel wti price averaged 65 per barrel fullyear 2018 compared 51 2017 wti traded discount brent throughout 2018 differentials brent ranged 3 10 2018 primarily due pipeline infrastructure constraints restricted flows inland crude export outlets gulf coast addition variability managements discussion analysis financial condition results operations factors impacting supply demand benchmark crude midfebruary 2019 wti price 54 per barrel chevron interests production heavy crude oil california indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page 37 company’s average us international crude oil sales prices contrast price movements global market crude oil price changes natural gas closely aligned supplyanddemand conditions regional markets fluctuations price natural gas united states closely associated customer demand relative volumes produced stored north america united states prices henry hub averaged 312 per thousand cubic feet mcf 2018 compared 297 2017 midfebruary 2019 henry hub spot price 261 per mcf outside united states price changes natural gas depend wide range supply demand regulatory circumstances chevron sells natural gas domestic pipeline market many locations chevron invested longterm projects produce liquefy natural gas transport tanker markets companys longterm contract prices liquefied natural gas lng typically linked crude oil prices equity lng offtake operated australian lng projects committed binding longterm contracts remainder sold asian spot lng market asian spot market reflects supply demand lng pacific basin directly linked crude oil prices international natural gas realizations averaged 629 per mcf 2018 compared 462 per mcf 2017 see page 37 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2018 averaged 2930 million barrels per day onesixth company’s net oilequivalent production 2018 occurred opecmember countries angola nigeria republic congo venezuela opec quotas effect company’s net crude oil production 2018 2017 company estimates net oilequivalent production 2019 grow 4 7 percent compared 2018 assuming brent crude oil price 60 per barrel excluding impact anticipated 2019 asset sales estimate subject many factors uncertainties including quotas actions may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction reservoir performance greaterthanexpected declines production mature fields startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds disruptions operations outlook future production levels also affected size number economic investment opportunities time lag initial exploration beginning production company increased investment emphasis shortcycle projects managements discussion analysis financial condition results operations partitioned zone saudi arabia kuwait production shutin beginning may 2015 result difficulties securing work equipment permits net oilequivalent production partitioned zone 2014 81000 barrels per day 2015 net oilequivalent production averaged 28000 barrels per day early 2019 production remains shut exact timing production restart uncertain dependent dispute resolution saudi arabia kuwait financial effects loss production 2018 significant expected significant 2019 chevron interests venezuelan crude oil production assets operated independent equity affiliates 2018 net oil equivalent production venezuela averaged 44000 barrels per day operating environment venezuela deteriorating time january 2019 united states government issued sanctions venezuelan national oil company petroleos de venezuela sa pdvsa company’s partner equity affiliates equity affiliates continue operate company conducting business pursuant general licenses issued coincident new sanctions future events could result environment venezuela becoming challenged could lead increased business disruption volatility associated financial results net proved reserves consolidated companies affiliated companies totaled 121 billion barrels oilequivalent yearend 2018 increase 3 percent yearend 2017 reserve replacement ratio 2018 136 percent refer table v beginning page 95 tabulation company’s proved net oil gas reserves geographic area beginning 2016 yearend 2016 2018 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2018 refer “results operations” section pages 32 34 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets changes tax laws regulations company’s significant marketing areas west coast gulf coast united states asia chevron operates significant ownership interests refineries areas refer “results operations” section pages 32 34 additional discussion company’s downstream operations consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies operating developments key operating developments events 2018 early 2019 included following upstream australia achieved startup train 2 wheatstone lng project united states produced first oil big foot project deepwater gulf mexico downstream south africa botswana completed sale refining marketing lubricant assets united states chevron phillips chemical company llc cpchem company’s 50 percentowned affiliate commenced operations new ethane cracker cedar bayou facility baytown texas managements discussion analysis financial condition results operations united states january 2019 chevron announced signed agreement acquire 110000 barrels per day refinery located pasadena texas transaction expected close later firsthalf 2019 subject regulatory approvals common stock dividends 2018 annual dividend 448 per share making 2018 31st consecutive year company increased annual per share dividend payout january 2019 companys board directors approved 007 per share increase quarterly dividend 119 per share payable march 2019 representing increase 6 percent common stock repurchase program company purchased 175 billion common stock 2018 stock repurchase program results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 13 beginning page 66 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages 28 31 us upstream us upstream earnings 328 billion 2018 compared 364 billion 2017 decrease earnings primarily due absence 2017 benefit us tax reform 333 billion higher tax items 160 million higher exploration expense 350 million partially offset higher crude oil realizations 245 billion higher crude oil production 112 billion us upstream earnings 364 billion 2017 compared loss 205 billion 2016 improvement earnings reflected benefit 333 billion us tax reform higher crude oil natural gas realizations 13 billion lower depreciation expenses 650 million primarily reflecting decrease impairments asset writeoffs lower operating expenses 140 million also contributed improvement company’s average realization us crude oil natural gas liquids 2018 5817 per barrel compared 4453 2017 3500 2016 average natural gas realization 186 per thousand cubic feet 2018 compared 210 2017 159 2016 net oilequivalent production 2018 averaged 791000 barrels per day 16 percent 2017 14 percent 2016 2018 2017 production increases shale tight properties permian basin texas new managements discussion analysis financial condition results operations mexico base business gulf mexico partially offset effect asset sales 35000 barrels per day 2017 2016 production increases shale tight properties permian basin texas new mexico base business gulf mexico offset effect asset sales 59000 barrels per day normal field declines net liquids component oilequivalent production 2018 averaged 618000 barrels per day 19 percent 2017 23 percent 2016 net natural gas production averaged 103 billion cubic feet per day 2018 7 percent 2017 8 percent 2016 refer “selected operating data” table page 37 threeyear comparison production volumes united states international upstream international upstream earnings 1004 billion 2018 compared 451 billion 2017 increase earnings primarily due higher crude oil natural gas realizations 338 billion 138 billion respectively higher natural gas sales volumes 167 billion partially offset lower gains asset sales 640 million higher depreciation operating tax expenses 470 million 460 million 230 million respectively foreign currency effects favorable impact earnings 100 billion periods international upstream earnings 451 billion 2017 compared loss 483 million 2016 increase earnings primarily due higher crude oil realizations 259 billion higher natural gas sales volumes 122 billion higher gains asset sales 750 million lower operating expenses 410 million foreign currency effects unfavorable impact earnings 578 million periods company’s average realization international crude oil natural gas liquids 2018 6425 per barrel compared 4946 2017 3861 2016 average natural gas realization 629 per thousand cubic feet 2018 compared 462 402 2017 2016 respectively international net oilequivalent production 214 million barrels per day 2018 4 percent 2017 12 percent 2016 2018 2017 production increases major capital projects primarily wheatstone gorgon australia partially offset normal field declines production entitlement effects impact asset sales 14000 barrels per day 2017 2016 production increases major capital projects lower planned maintenancerelated downtime partially offset production entitlement effects several locations normal field declines net liquids component international oilequivalent production 116 million barrels per day 2018 3 percent 2017 4 percent 2016 international net natural gas production 586 billion cubic feet per day 2018 16 percent 2017 42 percent 2016 refer “selected operating data” table page 37 threeyear comparison international production volumes us downstream us downstream operations earned 210 billion 2018 compared 294 billion 2017 decrease mainly due absence 2017 benefit us tax reform 116 billion higher operating expenses 420 million primarily due planned refinery turnaround activity partially offsetting higher margins refined product sales 380 million higher equity earnings 50 percentowned cpchem 320 million primarily reflecting absence impacts hurricane harvey us downstream operations earned 294 billion 2017 compared 131 billion 2016 increase primarily due 116 billion benefit us tax reform higher margins refined product sales 380 million lower operating expenses 160 million absence asset impairment 110 million partially offsetting increase lower gains asset sales 90 million lower earnings 50 percentowned cpchem 70 million primarily reflecting impacts hurricane harvey managements discussion analysis financial condition results operations total refined product sales 122 million barrels per day 2018 2 percent 2017 sales 120 million barrels per day 2017 decrease 1 percent 2016 primarily due divestment hawaii refining marketing assets fourth quarter 2016 refer “selected operating data” table page 37 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 170 billion 2018 compared 228 billion 2017 decrease earnings largely due lower margins refined product sales 590 million lower gains asset sales 470 million partially offset lower operating expenses 290 million sale companys canadian refining marketing business third quarter 2017 sale southern africa refining marketing business third quarter 2018 primarily contributed lower margins operating expenses foreign currency effects favorable impact earnings 161 million periods international downstream earned 228 billion 2017 compared 213 billion 2016 increase earnings primarily due higher gains asset sales 360 million partially offset higher operating expenses 140 million foreign currency effects unfavorable impact earnings 65 million periods total refined product sales 144 million barrels per day 2018 4 percent 2017 primarily due sales companys canadian refining marketing assets third quarter 2017 southern africa refining marketing business third quarter 2018 sales 149 million barrels per day 2017 2 percent 2016 primarily due higher diesel jet fuel sales refer “selected operating data” table page 37 threeyear comparison sales volumes gasoline refined products refinery input volumes consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2018 decreased 188 billion 2017 change periods mainly due absence prior year tax charge 247 billion related us tax reform lower employee expenses absence reclamation related charge former mining asset partially offset unfavorable tax items higher interest expense foreign currency effects increased net charges 105 million periods net charges 2017 increased 277 billion 2016 mainly due higher tax items primarily reflecting 247 billion expense us tax reform higher interest expense reclamation related charge former mining asset partially offset lower employee expense foreign currency effects decreased net charges 139 million periods consolidated statement income comparative amounts certain income statement categories shown sales operating revenues increased 2018 mainly due higher crude oil refined product natural gas prices increase 2017 2016 primarily due higher refined product crude oil prices higher crude oil volumes higher natural gas volumes beginning 2018 excise valueadded similar taxes collected behalf third parties longer included sales operating revenue netted taxes income accordance asu 201409 2017 2016 include 719 billion 691 billion respectively taxes collected behalf third parties managements discussion analysis financial condition results operations income equity affiliates increased 2018 2017 mainly due higher upstreamrelated earnings tengizchevroil kazakhstan petroboscan petropiar venezuela higher downstreamrelated earnings cpchem income equity affiliates increased 2017 2016 mainly due higher upstreamrelated earnings tengizchevroil kazakhstan angola lng refer note 14 beginning page 69 discussion chevron’s investments affiliated companies income 11 billion 2018 included net gains asset sales 713 million beforetax income 2017 2016 included net gains asset sales 22 billion 11 billion beforetax respectively interest income approximately 192 million 2018 107 million 2017 145 million 2016 foreign currency effects decreased income 123 million 2018 131 million 2017 186 million 2016 crude oil product purchases increased 188 billion 2018 primarily due higher crude oil refined product prices partially offset lower crude oil volumes purchases increased 164 billion 2017 primarily due higher crude oil refined product prices higher refined product crude oil volumes operating selling general administrative expenses increased 11 billion 2018 2017 increase included higher services fees 450 million receivable writedown 270 million higher transportation expenses 200 million contractual settlement 180 million operating selling general administrative expenses decreased 10 billion 2017 2016 decrease included lower employee expenses 690 million nonoperated joint venture expenses 380 million exploration expenses 2018 increased 2017 primarily due higher charges well writeoffs partially offset lower geological geophysical expenses exploration expenses 2017 decreased 2016 primarily due lower charges well writeoffs depreciation depletion amortization expenses increased 2018 2017 mainly due higher production levels certain oil gas producing fields partially offset lower depreciation rates certain oil gas producing fields lower impairment charges decrease 2017 2016 primarily due lower impairments lower depreciation rates certain oil gas producing properties absence 2016 impairment downstream asset partially offsetting decrease higher production levels accretion writeoffs certain oil gas producing fields reclamation related charge former mining asset beginning 2018 excise valueadded similar taxes collected behalf third parties netted taxes income longer included sales operating revenues accordance asu 201409 2017 2016 include 719 billion 691 billion respectively taxes collected behalf third parties decrease 2018 2017 mainly due lower local municipal taxes licenses partially offset higher duties reflecting managements discussion analysis financial condition results operations increased production taxes income increased 2017 2016 primarily due higher duties higher crude oil refined product natural gas sales higher production interest debt expenses increased 2018 2017 mainly due decrease amount interest capitalized interest debt expenses increased 2017 2016 due higher interest costs longterm debt partially offset increase amount interest capitalized components net periodic benefit costs decreased 2018 2017 primarily due higher asset base expected returns decrease recognized actuarial losses arising period decrease 2017 2016 mainly due lower interest costs lower settlement costs decrease amortization prior service costs partially offset increase plan asset values line added consolidated statement income accordance adoption asu 201707 increase income tax expense 2018 576 billion due increase total income tax company 1135 billion absence remeasurement benefits us tax reform recognized 2017 us income tax increased loss 441 million 2017 profit 473 billion 2018 increase earnings tax primarily driven effect higher crude oil prices us tax charge increased 369 billion yearoveryear periods 297 billion benefit 2017 724 million charge 2018 2017 included 202 billion benefit us tax reform primarily reflected remeasurement us deferred tax assets liabilities international income tax increased 966 billion 2017 1584 billion 2018 618 billion increase primarily driven effect higher crude oil prices higher crude prices primarily drove 206 billion increase international income tax expense yearoveryear periods 293 billion 2017 499 billion 2018 decline income tax benefit 2017 168 billion due increase total income tax company 1138 billion remeasurement impacts us tax reform us losses tax decreased loss 432 billion 2016 loss 441 million 2017 decrease losses tax primarily driven effect higher crude oil prices us tax benefit increased 650 million yearoveryear periods 232 billion 2016 297 billion 2017 us tax benefit 2017 included 202 billion benefit us tax reform primarily reflected remeasurement us deferred tax assets liabilities reduction 137 billion result impact decrease losses tax 388 billion international income tax increased 216 billion 2016 966 billion 2017 750 billion increase primarily driven effect higher crude oil prices gains asset sales primarily indonesia canada higher crude prices primarily drove 234 billion increase international income tax expense yearoveryear periods 588 million 2016 293 billion 2017 refer also discussion effective income tax rate note 16 page 74 managements discussion analysis financial condition results operations selected operating data12 managements discussion analysis financial condition results operations liquidity capital resources sources uses cash strength company’s balance sheet enabled fund timing differences throughout year cash inflows outflows cash equivalents marketable securities time deposits total balances 103 billion 48 billion december 31 2018 2017 respectively cash provided operating activities 2018 306 billion compared 203 billion 2017 127 billion 2016 reflecting higher crude oil prices increased production cash provided operating activities net contributions employee pension plans approximately 10 billion 2018 10 billion 2017 09 billion 2016 cash provided investing activities included proceeds deposits related asset sales 20 billion 2018 49 billion 2017 32 billion 2016 restricted cash 11 billion 11 billion december 31 2018 2017 respectively held cash shortterm marketable securities recorded “deferred charges assets” “prepaid expenses current assets” consolidated balance sheet amounts generally associated upstream abandonment activities tax payments funds held escrow taxdeferred exchanges refundable deposits related pending asset sales dividends paid common stockholders 85 billion 2018 81 billion 2017 80 billion 2016 debt capital lease obligations total debt capital lease obligations 345 billion december 31 2018 388 billion yearend 2017 43 billion decrease total debt capital lease obligations 2018 primarily due repayment longterm notes totaling 67 billion matured 2018 partly offset increase commercial paper company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 156 billion december 31 2018 compared 152 billion yearend 2017 amounts 99 billion 100 billion reclassified longterm debt end 2018 2017 respectively yearend 2018 settlement obligations expected require use working capital 2019 company intent ability evidenced committed credit facilities refinance longterm basis chevron automatic shelf registration statement expires may 2021 unspecified amount nonconvertible debt securities issued guaranteed company managements discussion analysis financial condition results operations major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa2 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations cash may generated asset dispositions capital program shareholder distributions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company also modify capital spending plans discontinue curtail stock repurchase program provide flexibility continue paying common stock dividend also remain committed retaining company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 18 shortterm debt page 77 common stock repurchase program july 2010 board directors approved ongoing stock repurchase program set term monetary limits inception program end 2018 company purchased 1958 million shares 2175 billion including 149 million shares 175 billion second half 2018 february 1 2019 company announced board directors authorized new stock repurchase program maximum dollar limit 25 billion set term limits repurchases may made time open market block purchases privately negotiated transactions manner determined company timing repurchases actual amount repurchased depend variety factors including market price companys shares general market economic conditions factors stock repurchase program obligate company acquire particular amount common stock may suspended discontinued time capital exploratory expenditures capital exploratory expenditures business segment 2018 2017 2016 follows managements discussion analysis financial condition results operations total expenditures 2018 201 billion including 57 billion company’s share equityaffiliate expenditures require cash outlays company 2017 2016 expenditures 188 billion 224 billion respectively including company’s share affiliates’ expenditures 47 billion 38 billion respectively 201 billion expenditures 2018 88 percent 177 billion related upstream activities approximately 87 percent expended upstream operations 2017 90 percent 2016 international upstream accounted 60 percent worldwide upstream investment 2018 69 percent 2017 77 percent 2016 company estimates 2019 capital exploratory expenditures 20 billion including 63 billion spending affiliates line 2018 expenditures reflects robust portfolio upstream downstream investments highlighted companys permian basin position additional shale tight development basins approximately 87 percent total 173 billion budgeted exploration production activities approximately 104 billion planned upstream capital spending relates base producing assets including 36 billion permian 16 billion shale tight rock investments approximately 51 billion upstream program planned major capital projects underway including 43 billion associated future growth wellhead pressure management project tengiz field kazakhstan global exploration funding expected 13 billion remaining upstream spend budgeted early stage projects supporting potential future developments company continue monitor crude oil market conditions expects restrict capital outlays oil price conditions deteriorate worldwide downstream spending 2019 estimated 25 billion 15 billion estimated projects united states investments technology businesses corporate operations 2019 budgeted 02 billion noncontrolling interests company noncontrolling interests 11 billion december 31 2018 12 billion december 31 2017 distributions noncontrolling interests totaled 91 million 78 million 2018 2017 respectively pension obligations information related pension plan contributions included beginning page 81 note 22 employee benefit plans heading “cash contributions benefit payments” financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2018 book value inventory lower replacement costs based average acquisition costs year approximately 51 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2018 higher 2017 2016 due higher income debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage companys debt ratio 182 percent yearend 2018 compared 207 percent 241 percent yearend 2017 2016 respectively offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements information related matters included page 86 note 23 contingencies commitments managements discussion analysis financial condition results operations following table summarizes company’s significant contractual obligations excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 22 beginning page 81 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 99 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20202021 period amounts represent principal balance excludes capital lease obligations include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices part implementation asu 201602 leases effective january 1 2019 company reclassify contracts currently incorporated unconditional purchase obligations disclosure operating leases first quarter 2019 results direct guarantees additional information related guarantees included page 86 note 23 contingencies commitments indemnifications information related indemnifications included page 86 note 23 contingencies commitments financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2018 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies companys risk management practices compliance policies reviewed audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2018 material companys results operations company uses monte carlo simulation method valueatrisk var model estimate maximum potential loss fair value 95 confidence level oneday holding period effect adverse changes market managements discussion analysis financial condition results operations conditions derivative commodity instruments held issued based inputs var companys primary risk exposures area derivative commodity instruments december 31 2018 2017 material companys cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2018 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2018 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” page 70 note 14 investments advances discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page 70 note 15 heading “mtbe” ecuador information related ecuador matters included note 15 heading “ecuador” beginning page 70 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 141 billion asset retirement obligations yearend 2018 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2018 environmental expenditures refer note 23 page 86 additional discussion environmental remediation provisions yearend reserves refer also note 24 page 88 additional discussion companys asset retirement obligations suspended wells information related suspended wells included note 20 accounting suspended exploratory wells beginning page 79 income taxes information related income tax contingencies included pages 74 76 note 16 page 86 note 23 heading “income taxes” contingencies information related contingencies included page 87 note 23 consolidated financial statements heading “other contingencies” managements discussion analysis financial condition results operations environmental matters company subject various international federal state local environmental health safety laws regulations marketbased programs laws regulations programs continue evolve expected increase number complexity time govern manner company conducts operations also products sells example international agreements national regional state legislation eg california ab32 sb32 ab398 regulatory measures aim limit reduce greenhouse gas ghg emissions currently various stages implementation consideration ghg issues responses issues international agreements national regional state legislation regulations integrated company’s strategy planning capital investment reviews risk management tools processes applicable also factored company’s longrange supply demand energy price forecasts reflect longrange effects renewable fuel penetration energy efficiency standards climaterelated policy actions demand response oil natural gas prices addition legislation regulations intended address hydraulic fracturing also continue evolve national state local levels refer “risk factors” part item 1a pages 18 21 discussion inherent risks increasingly restrictive environmental regulation could materially impact company’s results operations financial condition costs complying existing laws regulations pertaining company operations products embedded normal costs business however possible predict certainty amount additional investments new existing technology facilities amounts increased operating costs incurred future prevent control reduce eliminate releases hazardous materials pollutants environment remediate restore areas damaged prior releases hazardous materials comply new environmental laws regulations although costs may significant results operations single period company presently expect material adverse effect companys liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2018 approximately 20 billion consolidated companies included expenditures approximately 05 billion environmental capital expenditures 15 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2019 total worldwide environmental capital expenditures estimated 05 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows managements discussion analysis financial condition results operations oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2018 chevrons uop depreciation depletion amortization dda oil gas properties 148 billion proved developed reserves beginning 2018 61 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2018 would increased approximately 800 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page 95 changes proved reserve estimates three years ended december 31 2018 table vii “changes standardized measure discounted future net cash flows proved reserves” page 101 estimates proved reserve values three years ended december 31 2018 oil gas reserves commentary read conjunction properties plant equipment section note 1 beginning page 55 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions generally consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 17 page 77 section properties plant equipment note 1 summary significant accounting policies beginning page 55 company routinely performs impairment reviews triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision companys crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets addition impairments could occur due changes national state local environmental regulations laws including designed stop impede development production oil gas also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision managements discussion analysis financial condition results operations made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value occurs determination must made whether loss otherthantemporary case investment impaired number differing assumptions potentially affecting whether investment impaired period amount impairment sensitivity analysis practicable individually material impairments ppe investments recorded 2018 2017 company reported impairments certain oil gas properties brazil united states 2016 due reservoir performance lower crude oil prices sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired resulted larger impacts impaired assets asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2018 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 24 page 88 additional discussions asset retirement obligations pension postretirement benefit plans note 22 beginning page 81 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page 83 note 22 relevant headings actual rates may vary significantly estimates unanticipated changes beyond companys control 2018 company used expected longterm rate return 675 percent discount rate service costs 37 percent discount rate interest cost 30 percent us pension plans actual return 2018 negative 10 years ended december 31 2018 actual asset returns averaged 79 percent plans additionally exception three years within 10year period actual asset returns plans equaled exceeded 675 percent year total pension expense 2018 11 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 63 percent companywide pension expense would reduced total pension plan expense 2018 approximately 83 million 1 percent increase discount rates plan would reduced pension expense 2018 approximately 271 million aggregate funded status recognized december 31 2018 net liability approximately 39 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2018 company used discount rate 42 percent measure obligations us pension plans indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 62 percent companywide pension obligation would reduced plan obligation approximately 339 million would decreased plan’s underfunded status approximately 18 billion 14 billion managements discussion analysis financial condition results operations company’s opeb plans expense 2018 123 million total liability unfunded end 2018 24 billion main us opeb plan company used discount rate service cost 38 percent discount rate interest cost 32 percent measure expense 2018 43 percent discount rate measure benefit obligations december 31 2018 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2018 opeb expense opeb liabilities end 2018 information sensitivity health care costtrend rate refer page 83 note 22 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page 82 note 22 description method used amortize 46 billion beforetax actuarial losses recorded company december 31 2018 estimate costs recognized expense 2019 addition information related company contributions included page 85 note 22 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 23 beginning page 86 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2018 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 4 beginning page 60 information regarding new accounting standards quarterly results unaudited consolidated statement income millions dollars except pershare amounts consolidated statement comprehensive income millions dollars consolidated balance sheet millions dollars except pershare amounts consolidated statement cash flows millions dollars consolidated statement equity shares thousands amounts millions dollars notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates circumstances change additional information becomes known subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income consolidated statement equity fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 inputs quoted prices active markets identical assets liabilities level 2 inputs quoted prices included within level 1 directly indirectly observable asset liability level 3 inputs observable market derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” notes consolidated financial statements millions dollars except pershare amounts inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories primarily stated cost net realizable value properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 20 beginning page 79 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net cash flows proved crude oil natural gas properties company performs impairment reviews country concession psc development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 8 beginning page 63 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 24 page 88 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced impairments capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annually december 31 frequently event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated crude oil natural gas mineralproducing properties liability aro notes consolidated financial statements millions dollars except pershare amounts made accordance accounting standards asset retirement environmental obligations refer note 24 page 88 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition company accounts delivery order crude oil natural gas petroleum chemical products separate performance obligation revenue recognized performance obligation satisfied typically occurs point time control product transfers customer payment generally due within 30 days delivery company accounts delivery transportation fulfillment cost separate performance obligation recognizes costs operating expense period revenue related commodity recognized revenue measured amount company expects receive exchange transferring commodities customer company’s commodity sales typically based prevailing marketbased prices may include discounts allowances market prices become known terms company’s contracts transaction price included revenue based company’s estimate likely outcome discounts allowances estimated using combination historical recent data trends deliveries contain multiple products observable standalone selling price generally used measure revenue product company includes estimates transaction price extent significant reversal revenue probable subsequent periods excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented net basis taxes income consolidated statement income page 50 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income prior adoption asc 606 january 1 2018 revenues associated sales crude oil natural gas petroleum chemicals products sources recorded title passed customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement company’s longterm incentive plan ltip awards include stock options stock appreciation rights graded vesting provisions onethird award vests first second third anniversaries date grant addition performance shares granted companys ltip vest end threeyear performance period awards granted companys ltip beginning 2017 stock options stock appreciation rights graded vesting one third award vests annually january 31 first anniversary grant date standard restricted stock unit awards cliff vesting total award vest january 31 fifth anniversary grant date subject adjustment upon termination pursuant satisfaction certain criteria company amortizes awards straightline basis notes consolidated financial statements millions dollars except pershare amounts note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ended december 31 2018 reflected table amounts net tax refer note 22 beginning page 81 reclassified components totaling 779 included employee benefit costs year ended december 31 2018 related income taxes period totaling 176 reflected income tax expense consolidated statement income reclassified amounts insignificant stranded tax reclassification retained earnings per asu 201802 refer note 4 new accounting standards page 60 notes consolidated financial statements millions dollars except pershare amounts note 3 information relating consolidated statement cash flows loan tengizchevroil llp development future growth wellhead pressure management project represents majority net borrowing loans equity affiliates 2016 “net sales purchases treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 1751 1 2 2018 2017 2016 respectively company purchased 149 million shares stock repurchase plan 1750 2018 shares repurchased plan 2017 2016 consolidated statement cash flows excludes changes consolidated balance sheet affect cash depreciation depletion amortization dry hole expense deferred income tax provision collectively include approximately 11 billion noncash reductions properties plant equipment recorded 2018 relating impairments noncash charges refer also note 24 page 88 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2018 notes consolidated financial statements millions dollars except pershare amounts major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 25 2018 1183 2017 56 2016 january 1 2018 chevron adopted accounting standards updates asu 201615 201618 require retrospective adjustment prior periods statement cash flows addition requirements asu 201615 specifies new standards classification distributions equity affiliates adopting new standards chevron utilized cumulative earnings approach evaluate returns investment equity affiliates year ended 2017 2016 total 166 322 respectively reclassified “distributions less income equity affiliates” “proceeds deposits related asset sales returns investment” adoption asu 201618 requires inclusion restricted cash associated changes restricted cash consolidated statement cash flows impact asu 201618 captured across several line items statement cash flows including “net decrease increase operating working capital” “decrease increase deferred charges” “proceeds deposits related asset sales returns investment” associated net changes captured “net cash provided operating activities” “net cash used investing activities” line item “net sales purchases shortterm investments” removed conjunction adoption asu 201618 table quantifies beginning ending balances restricted cash restricted cash equivalents consolidated balance sheet note 4 new accounting standards revenue recognition topic 606 revenue contracts customers january 1 2018 chevron adopted asu 201409 related amendments using modified retrospective transition method require restatement prior periods impact adoption standard material effect company’s consolidated financial statements additional information company’s revenue refer note 25 beginning page 88 income gains losses derecognition nonfinancial assets subtopic 61020 january 1 2018 company adopted asu 201705 provides clarification regarding guidance accounting derecognition nonfinancial assets adoption standard impact company’s consolidated financial statements compensation retirement benefits topic 715 effective january 1 2018 chevron adopted asu 201707 retrospective basis standard requires disaggregation service cost component components net periodic benefit cost allows service cost component net benefit cost eligible capitalization effects retrospective adoption consolidated statement income 2017 2016 move 310 366 operating expenses 338 379 selling general administrative expenses components net periodic benefits cost respectively notes consolidated financial statements millions dollars except pershare amounts statement cash flows topic 230 classification certain cash receipts cash payments effective january 1 2018 chevron adopted asu 201615 retrospective basis standard provides clarification certain cash receipts cash payments presented classified consolidated statement cash flows adoption asu material impact companys consolidated statement cash flows additional information refer note 3 beginning page 59 statement cash flows topic 230 restricted cash effective january 1 2018 chevron adopted asu 201618 retrospective basis standard requires entity explain changes total cash equivalents restricted cash restricted cash equivalents consolidated statement cash flows provide reconciliation consolidated balance sheet cash equivalents restricted cash restricted cash equivalents separately presented one line item consolidated balance sheet company’s restricted cash balances included beginning ending balances consolidated statement cash flows additional information refer note 3 beginning page 59 income statement reporting comprehensive income topic 220 reclassification certain tax effects accumulated comprehensive income fourth quarter 2018 company elected early adopt asu 201802 permits reclassification stranded tax effects accumulated comprehensive income result us tax reform accordingly chevron reclassified 562 accumulated comprehensive losses retained earnings associated reduction us statutory tax rate 35 percent 21 percent accordance accounting policy company releases stranded income tax effects accumulated comprehensive income period underlying activity ceases exist asu 201802 allowed reclassification stranded tax effects result change tax rates due us tax reform recorded upon adoption asu rather actual date underlying activity ceases exist additional detail refer note 2 beginning page 58 leases topic 842 february 2016 financial accounting standards board fasb issued asu 201602 became effective company january 1 2019 standard requires lessees present rightofuse assets lease liabilities consolidated balance sheet company plans elect shortterm lease exception provided standard therefore recognize rightofuse assets lease liabilities leases term greater one year company intends elect option apply transition provisions new standard adoption date instead earliest comparative period presented financial statements company plans elect package practical expedients reevaluate existing lease contracts lease classifications therefore make changes leases already recognized consolidated balance sheet asc 840 leases fully amortized amended modified addition company reassess initial direct costs existing leases company intends apply land easement practical expedient chevron plans elect practical expedient separate nonlease components lease components asset classes except certain asset classes significant nonlease ie service components addition lease component company reclassify contracts currently classified leases operating leases new standard company completed accounting policy disclosure updates system implementation necessary meet standards requirements company expect adoption asu material impact finance leases currently referred capital leases company estimates operating lease rightofuse assets lease liabilities consolidated balance sheet approximately 4 billion january 1 2019 company expects implementation standard minimal impact consolidated statement income consolidated statement cash flows financial instruments credit losses topic 326 june 2016 fasb issued asu 201613 becomes effective company beginning january 1 2020 standard requires companies use forwardlooking information calculate credit loss estimates company evaluating effect standard company’s consolidated financial statements notes consolidated financial statements millions dollars except pershare amounts note 5 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment vessels office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets rental expenses incurred operating leases 2018 2017 2016 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2018 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows notes consolidated financial statements millions dollars except pershare amounts note 6 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows note 7 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 14 beginning page 69 discussion tco operations summarized financial information 100 percent tco presented table note 8 fair value measurements tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2018 december 31 2017 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2018 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values notes consolidated financial statements millions dollars except pershare amounts obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company individually material impairments 2018 2017 investments advances company individually material impairments investments advances 2018 2017 assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 9342 4813 december 31 2018 december 31 2017 respectively instruments held time deposits bank time deposits maturities greater 90 days carryingfair values 950 zero december 31 2018 december 31 2017 respectively fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2018 cash equivalents” include investments carryingfair value 1139 1130 december 31 2018 december 31 2017 respectively december 31 2018 investments classified level 1 include restricted funds related certain upstream abandonment activities tax payments financing program reported “deferred charges assets” consolidated balance sheet longterm debt excluding capital lease obligations 18706 23477 december 31 2018 december 31 2017 respectively estimated fair values 18729 23943 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 17858 classified level 1 fair value longterm debt 871 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2018 2017 material note 9 financial derivative instruments derivative commodity instruments company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities notes consolidated financial statements millions dollars except pershare amounts company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2018 december 31 2017 december 31 2016 classification consolidated balance sheet consolidated statement income consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2018 december 31 2017 consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions right offset concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers notes consolidated financial statements millions dollars except pershare amounts note 10 assets held sale december 31 2018 company classified 1863 net properties plant equipment “assets held sale” consolidated balance sheet assets primarily associated upstream operations anticipated sold next 12 months revenues earnings contributions assets 2018 material note 11 equity retained earnings december 31 2018 2017 included approximately 22362 18473 respectively company’s share undistributed earnings equity affiliates december 31 2018 78 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron longterm incentive plan addition 748211 shares remain available issuance 1600000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 12 earnings per share basic earnings per share eps based upon “net income loss attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 21 “stock options sharebased compensation” beginning page 80 table sets forth computation basic diluted eps note 13 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies notes consolidated financial statements millions dollars except pershare amounts company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments receivables assets yearend 2018 2017 follows segment sales operating revenues operating segment sales operating revenues including internal transfers years 2018 2017 2016 presented table next page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining notes consolidated financial statements millions dollars except pershare amounts marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil activities include revenues insurance operations real estate activities technology companies segment income taxes segment income tax expense years 2018 2017 2016 follows segment information additional information segmentation major equity affiliates contained note 14 page 69 information related properties plant equipment segment contained note 17 page 77 notes consolidated financial statements millions dollars except pershare amounts note 14 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2018 company’s carrying value investment tco 120 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets included investment loan tco fund development future growth wellhead pressure management project balance 2060 including accrued interest see note 7 page 63 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company operates heavy oil huyapari field upgrading project venezuela’s orinoco belt december 31 2018 company’s carrying value investment petropiar approximately 136 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela december 31 2018 company’s carrying value investment petroboscan approximately 97 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets company also outstanding longterm loan petroboscan 626 yearend 2018 caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company investments advances totaling 1022 includes longterm loans 468 yearend 2018 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns notes consolidated financial statements millions dollars except pershare amounts angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals lubricants predominantly south korea information “sales operating revenues” consolidated statement income includes 10378 8165 5786 affiliated companies 2018 2017 2016 respectively “purchased crude oil products” includes 6598 4800 3468 affiliated companies 2018 2017 2016 respectively “accounts notes receivable” consolidated balance sheet includes 884 1141 due affiliated companies december 31 2018 2017 respectively “accounts payable” includes 631 498 due affiliated companies december 31 2018 2017 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevrons net loans affiliates 3402 3853 3535 december 31 2018 2017 2016 respectively note 15 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party seven pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador background chevron defendant civil lawsuit initiated superior court nueva loja lago agrio ecuador provincial court may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring notes consolidated financial statements millions dollars except pershare amounts action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations lago agrio judgment february 14 2011 provincial court rendered judgment chevron court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 provincial court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice national court february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court hear appeal march 29 2012 matter transferred provincial court national court november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court approved courtappointed liquidator’s report damages calculated total judgment case 19100 november 13 2013 national court ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 23 2013 chevron appealed decision ecuador constitutional court ecuadors highest court reporting justice constitutional court heard oral arguments appeal july 16 2015 july 10 2018 ecuadors constitutional court released decision rejecting chevrons appeal sought nullify national courts judgment chevron appeals available ecuador lago agrio plaintiffs enforcement actions chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment may 1 2013 ontario superior court justice held court jurisdiction chevron canada limited purposes action stayed action due absence evidence chevron corporation assets ontario lago agrio plaintiffs appealed decision december 17 2013 court appeal ontario affirmed lower court’s decision jurisdiction set aside stay allowing recognition enforcement action heard ontario superior court justice chevron appealed decision supreme court canada september 4 2015 supreme court dismissed appeal affirmed ontario superior court justice jurisdiction chevron canada limited purposes action january 20 2017 ontario superior court justice granted chevron canada limited’s chevron corporation’s motions summary judgment concluding two companies separate legal entities separate rights obligations result superior court dismissed recognition enforcement claim chevron canada limited chevron corporation still remains defendant action february 3 2017 lago agrio plaintiffs appealed superior courts january 20 2017 decision may 24 2018 court appeal ontario upheld superior court’s dismissal chevron canada limited case june 22 2018 lago agrio plaintiffs filed leave appeal decision court appeal ontario supreme court canada june 27 2012 lago agrio plaintiffs filed complaint chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment may 13 2015 public prosecutor issued nonbinding opinion recommended superior court justice reject plaintiffs recognition enforcement request finding among things lago agrio judgment procured fraud corruption cannot recognized brazil violates brazilian international public order november 29 2017 superior court notes consolidated financial statements millions dollars except pershare amounts justice issued decision dismissing lago agrio plaintiffs’ recognition enforcement proceeding based jurisdictional grounds june 15 2018 decision became final judgment brazil october 15 2012 provincial court issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary january 30 2013 appellate court upheld freeze order june 4 2013 supreme court argentina revoked freeze order entirety december 12 2013 lago agrio plaintiffs served chevron notice filing enforcement proceeding national court first instance argentina chevron filed answer february 27 2014 lago agrio plaintiffs responded december 29 2015 april 19 2016 public prosecutor argentina issued nonbinding opinion recommending national court first instance argentina reject lago agrio plaintiffs request recognize ecuadorian judgment argentina february 24 2017 public prosecutor argentina issued supplemental opinion reaffirming previous recommendations november 1 2017 national court first instance argentina issued decision dismissing lago agrio plaintiffs recognition enforcement proceeding based jurisdictional grounds november 2 2017 lago agrio plaintiffs appealed decision federal civil court appeals july 3 2018 federal civil court appeals affirmed national court first instance’s dismissal lago agrio plaintiffs’ recognition enforcement action based jurisdictional grounds october 5 2018 federal civil court appeals granted part admissibility lago agrio plaintiffs’ appeal supreme court argentina chevron continues believe ecuadorian judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome enforcement action chevron expects continue vigorous defense imposition liability contest defend enforcement actions companys bilateral investment treaty arbitration claims chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit january 25 2012 tribunal issued first interim measures award requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within outside ecuador judgment chevron lago agrio case pending order tribunal february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within outside ecuador judgment chevron february 27 2012 tribunal issued third interim award confirming jurisdiction hear chevrons arbitration claims february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” republic ecuador subsequently filed district court hague request set aside tribunal’s interim awards first partial award described january 20 2016 district court denied republics request april 13 2016 republic ecuador appealed decision july 18 2017 appeals court hague denied republics appeal october 18 2017 republic appealed decision appeals court hague supreme court netherlands tribunal divided merits phase proceeding three phases september 17 2013 tribunal issued first partial award phase one finding settlement agreements republic ecuador texpet applied texpet chevron released texpet chevron claims based collective diffuse rights arising texpets operations former concession area precluded third parties asserting collectivediffuse rights environmental claims relating texpets operations former concession area preclude individual claims personal harm tribunal held hearing april 2930 2014 address remaining issues relating phase one march 12 2015 issued nonbinding decision lago agrio plaintiffs complaint face includes claims barred settlement agreement republic ecuador texpet decision tribunal deferred phase two remaining issues phase one including whether republic ecuador breached 1995 settlement notes consolidated financial statements millions dollars except pershare amounts agreement remedies available chevron texpet result breach phase two issues addressed hearing held april may 2015 august 30 2018 tribunal issued phase two award favor chevron texpet tribunal unanimously held ecuadorian judgment procured fraud bribery corruption based claims republic ecuador settled released mid1990s concluding ecuadorian judgment “violates international public policy” “should recognized enforced courts states” specifically tribunal found republic ecuador breached obligations 1995 1998 settlement agreements releasing texpet affiliates public environmental claims ecuadorian judgment exclusively based ii republic ecuador committed denial justice customary international law fair equitable treatment provision bit due fraud corruption lago agrio litigation tribunal also found texpet satisfied environmental remediation obligations 40 remediation program ecuador certified texpet performed obligations settlement agreement among things tribunal ordered republic ecuador take immediate steps remove status enforceability ecuadorian judgment b promptly advise writing state lago agrio plaintiffs may seeking enforcement recognition ecuadorian judgment tribunal’s declarations orders awards c take measures “wipe consequences” ecuadors internationally wrongful acts regard ecuadorian judgment compensate chevron injuries resulting ecuadorian judgment december 10 2018 republic ecuador filed district court hague request set aside tribunals phase two award tribunal set date phase three third final phase arbitration damages chevrons injuries determined companys rico action february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron sought relief included declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable trial commenced october 15 2013 concluded november 22 2013 march 4 2014 federal district court entered judgment favor chevron prohibiting defendants seeking enforce lago agrio judgment united states prohibiting profiting illegal acts defendants appealed federal district courts decision april 20 2015 us court appeals second circuit heard oral arguments august 8 2016 second circuit issued unanimous opinion affirming full judgment federal district court october 27 2016 second circuit denied defendants petitions en banc rehearing opinion appeal march 27 2017 two defendants filed petition writ certiorari united states supreme court june 19 2017 united states supreme court denied defendants petition writ certiorari managements assessment ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment management believe judgment utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss notes consolidated financial statements millions dollars except pershare amounts note 16 taxes reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table includes onetime tax costs benefits associated changes uncertain tax positions valuation allowances 2018 increase income tax charge 5763 benefit 48 2017 charge 5715 2018 result yearoveryear increase total income tax expense primarily due higher crude oil realizations offset lower gains asset sales 2018 compared 2017 us tax reform resulted benefit 2020 recognized 2017 reflecting remeasurement us deferred tax assets liabilities company’s effective tax rate changed 05 percent 2017 28 percent 2018 change effective tax rate consequence mix effect resulting absolute level earnings losses whether arose higher lower tax rate jurisdictions impact us tax reform 2018 2017 results noted us tax reform resulted remeasurement us deferred tax assets liabilities 2017 us tax return 2017 prepared filed 2018 result material change provisional amounts recognized 2017 amounts considered final notes consolidated financial statements millions dollars except pershare amounts company records deferred taxes taxjurisdiction basis reported deferred tax balances composed following deferred tax liabilities end 2018 increased approximately 400 yearend 2017 increase primarily related property plant equipment temporary differences deferred tax assets decreased approximately 1800 2018 decrease primarily related lower foreign tax credits utilization tax loss carryforwards overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2018 company tax loss carryforwards approximately 13731 tax credit carryforwards approximately 1198 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2019 2036 us foreign tax credit carryforwards 10536 expire 2019 2028 december 31 2018 2017 deferred taxes classified consolidated balance sheet follows enactment us tax reform 2017 imposed onetime us federal tax deemed repatriation unremitted earnings indefinitely reinvested abroad material impact company’s financial results indefinite reinvestment assertion continues apply purpose determining deferred tax liabilities us state foreign withholding tax purposes us state foreign withholding taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 59900 december 31 2018 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount state foreign taxes might payable possible remittance earnings intended reinvested indefinitely company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods notes consolidated financial statements millions dollars except pershare amounts following table indicates changes company’s unrecognized tax benefits years ended december 31 2018 2017 2016 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included approximately 82 percent 5070 unrecognized tax benefits december 31 2018 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2018 jurisdictions latest years income tax examinations finalized follows united states 2013 nigeria 2000 australia 2006 kazakhstan 2007 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2018 accruals 33 anticipated interest penalty obligations included consolidated balance sheet compared accruals 178 yearend 2017 income tax expense benefit associated interest penalties 8 161 38 2018 2017 2016 respectively beginning 2018 taxes netted taxes income accordance asu 201409 refer note 25 revenue beginning page 88 notes consolidated financial statements millions dollars except pershare amounts note 17 properties plant equipment1 united states australia country accounted 10 percent company’s net properties plant equipment ppe 2018 australia ppe 53768 55514 53962 2018 2017 2016 respectively net dry hole expense related prior years’ expenditures 343 42 175 2018 2017 2016 respectively depreciation expense includes accretion expense 654 668 749 2018 2017 2016 respectively impairments 735 1021 3186 2018 2017 2016 respectively note 18 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2018 company interest rate swaps shortterm debt december 31 2018 company 9900 committed credit facilities various major banks enable refinancing shortterm obligations longterm basis credit facilities consist 364day facility enables borrowing 9575 allows company convert amounts outstanding term loan period one year 325 fiveyear facility expiring december 2020 facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2018 notes consolidated financial statements millions dollars except pershare amounts company classified 9900 10000 shortterm debt longterm december 31 2018 2017 respectively settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis note 19 longterm debt total longterm debt including capital lease obligations december 31 2018 28733 company’s longterm debt outstanding yearend 2018 2017 follows weightedaverage interest rate december 31 2018 interest rate december 31 2018 maturity date conditional upon occurrence certain events 2021 earliest period loan may become payable details capital lease obligations see note 5 beginning page 62 chevron automatic shelf registration statement expires may 2021 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt excluding capital lease obligations principal balance 23730 matures follows 2019 5000 2020 5054 2021 2272 2022 4050 2023 3003 2023 4351 see note 8 beginning page 63 information concerning fair value company’s longterm debt notes consolidated financial statements millions dollars except pershare amounts note 20 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well b business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense following table indicates changes company’s suspended exploratory well costs three years ended december 31 2018 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 3361 exploratory well costs capitalized one year december 31 2018 1585 14 projects related projects drilling activities underway firmly planned near future 1776 balance related 16 projects areas requiring major capital expenditure production could begin additional drilling efforts underway firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1776 referenced following activities associated assessing reserves projects’ economic viability 672 three projects undergoing frontend engineering design final investment decision expected within four years b 93 one project development concept review government c 963 eight projects development alternatives review 48 four projects miscellaneous activities projects smaller amounts suspended progress made 30 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects half decisions expected occur next five years 3361 suspended well costs capitalized period greater one year december 31 2018 represents 153 exploratory wells 30 projects tables contain aging costs well project basis notes consolidated financial statements millions dollars except pershare amounts note 21 stock options sharebased compensation expense stock options 2018 2017 2016 105 83 tax 137 89 tax 271 176 tax respectively addition compensation expense stock appreciation rights restricted stock performance shares restricted stock units 60 47 tax 231 150 tax 371 241 tax 2018 2017 2016 respectively significant stockbased compensation cost capitalized december 31 2018 december 31 2017 cash received payment option exercises sharebased payment arrangements 2018 2017 2016 1159 1100 647 respectively actual tax benefits realized tax deductions option exercises 43 48 21 2018 2017 2016 respectively cash paid settle performance shares restricted stock units stock appreciation rights 157 187 82 2018 2017 2016 respectively awards chevron longterm incentive plan ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance shares nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards issued january 1 2017 contractual terms vary three years performance shares restricted stock units 10 years stock options stock appreciation rights awards issued january 1 2017 contractual terms vary three years performance shares special restricted stock units five years standard restricted stock units 10 years stock options stock appreciation rights forfeitures performance shares restricted stock units stock appreciation rights recognized occur forfeitures stock options estimated using historical forfeiture data dating back 1990 fair market values stock options stock appreciation rights granted 2018 2017 2016 measured date grant using blackscholes optionpricing model following weightedaverage assumptions 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2018 presented total intrinsic value ie difference exercise price market price options exercised 2018 2017 2016 506 407 240 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2018 53 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plan cost expected recognized weightedaverage period 16 years january 1 2018 number ltip performance shares outstanding equivalent 3090793 shares 2018 1491141 performance shares granted 746450 shares vested cash proceeds distributed recipients 165754 shares forfeited december 31 2018 performance shares outstanding 3669730 fair value liability recorded instruments 258 measured using monte carlo simulation method notes consolidated financial statements millions dollars except pershare amounts january 1 2018 number restricted stock units outstanding equivalent 1236500 shares 2018 819769 restricted stock units granted 222946 units vested cash proceeds distributed recipients 95844 units forfeited december 31 2018 restricted stock units outstanding 1737479 fair value liability recorded vested portion instruments 125 valued stock price december 31 2018 addition outstanding stock appreciation rights granted ltip totaled approximately 42 million equivalent shares december 31 2018 fair value liability recorded vested portion instruments 70 note 22 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement benefit opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs companys main us medical plan increase premedicare company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension opeb plans 2018 2017 follows amounts recognized consolidated balance sheet company’s pension opeb plans december 31 2018 2017 include notes consolidated financial statements millions dollars except pershare amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 4448 5286 end 2018 2017 respectively amounts consisted accumulated benefit obligations us international pension plans 10514 4360 respectively december 31 2018 12194 5009 respectively december 31 2017 information us international pension plans accumulated benefit obligation excess plan assets december 31 2018 2017 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2018 2017 2016 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2018 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 13 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2019 company estimates actuarial losses 239 19 3 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 290 recognized “accumulated comprehensive loss” 2019 related lumpsum settlement costs main us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2018 approximately 4 8 years us international pension plans respectively 8 years opeb plans 2019 company estimates prior service credits costs 2 12 notes consolidated financial statements millions dollars except pershare amounts 28 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2018 company used expected longterm rate return 675 percent us pension plan assets account 67 percent company’s pension plan assets 2017 company used longterm rate return 675 percent plans 2016 725 percent marketrelated value assets main us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension opeb plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds projected cash flows discounted valuation date using yield curve main us pension opeb plans effective discount rates derived analysis end 2018 42 percent main us pension plan 43 percent main us opeb plan discount rates plans end 2017 35 36 percent respectively 2016 39 41 percent plans respectively benefit assumptions assumed health care costtrend rates significant effect amounts reported retiree health care costs measurement accumulated postretirement benefit obligation december 31 2018 main us opeb plan assumed health care costtrend rates start 72 percent 2019 gradually decline 45 percent 2025 beyond measurement december 31 2017 assumed health care costtrend rates started 74 percent 2018 gradually declined 45 percent 2025 beyond 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans plan assets investment strategy fair value measurements company’s pension plans 2018 2017 following page notes consolidated financial statements millions dollars except pershare amounts us equities include investments company’s common stock amount 9 december 31 2018 12 december 31 2017 collective trustsmutual funds us plans entirely index funds international plans mostly unit trust index funds mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based thirdparty appraisals occur least year property portfolio alternative investments focus marketneutral strategies low expected correlation traditional asset classes “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts level 3 investments privateequity limited partnerships nav effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined notes consolidated financial statements millions dollars except pershare amounts primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 91 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys investment committee established following approved asset allocation ranges equities 3060 percent fixed income cash 2065 percent real estate 015 percent alternative investments 015 percent uk pension plan uk board trustees established following asset allocation guidelines equities 2545 percent fixed income cash 4075 percent real estate 515 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety factors including market conditions illiquidity constraints mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2018 company contributed 803 232 us international pension plans respectively 2019 company expects contributions approximately 700 us plans 200 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments tax law changes economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying opeb benefits approximately 175 2019 166 paid 2018 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 270 316 281 2018 2017 2016 respectively benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2018 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2018 2017 trust assets 34 35 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 1048 936 662 2018 2017 2016 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 21 beginning page 80 notes consolidated financial statements millions dollars except pershare amounts note 23 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 16 beginning page 74 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provisions made years examination subject future examination guarantees company two guarantees equity affiliates totaling 968 amount 637 associated financing arrangement equity affiliate approximate 3year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 331 associated certain payments terminal use agreement entered equity affiliate approximate 9year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drill ships utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2019 1300 2020 1200 2021 1300 2022 1000 2023 800 2023 4700 portion commitments may ultimately shared project partners total payments agreements approximately 1400 2018 1300 2017 1300 2016 part implementation asu 201602 topic 842 effective january 1 2019 company reclassify contracts currently incorporated unconditional purchase obligations disclosure operating leases first quarter 2019 results environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various operating closed divested sites including limited federal superfund sites analogous sites state laws refineries chemical plants marketing facilities crude oil fields mining sites although company provided known environmental obligations probable reasonably estimable likely company continue incur additional liabilities amount additional future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties future costs may material results notes consolidated financial statements millions dollars except pershare amounts operations period recognized company expect costs material effect consolidated financial position liquidity chevron’s environmental reserve december 31 2018 1327 included balance 258 related remediation activities approximately 144 sites company identified potentially responsible party provisions federal superfund law analogous state laws provide joint several liability responsible parties future actions regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2018 environmental reserves balance 1069 748 related company’s us downstream operations 24 international downstream operations 296 upstream operations 1 businesses liabilities sites primarily associated company’s plans activities remediate soil groundwater contamination company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2018 recorded liability material company’s results operations consolidated financial position liquidity refer note 24 page 88 discussion company’s asset retirement obligations contingencies governmental entities california jurisdictions filed legal proceedings fossil fuel producing companies including chevron purporting seek legal equitable relief address alleged impacts climate change proceedings likely filed parties unprecedented legal theories set forth proceedings entail possibility damages liability injunctions production fossil fuels believe remote could material adverse effect company’s results operations financial condition management believes proceedings legally factually meritless detract constructive efforts address important policy issues presented climate change vigorously defend proceedings chevron receives claims submits claims customers trading partners joint venture partners us federal state local regulatory bodies governments contractors insurers suppliers individuals amounts claims individually aggregate may significant take lengthy periods resolve may result gains losses future periods company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result significant gains losses future periods notes consolidated financial statements millions dollars except pershare amounts note 24 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2018 2017 2016 table amount associated revisions estimated cash flows 2018 reflects decreased cost estimates abandon wells equipment facilities longterm portion 14050 balance end 2018 12957 note 25 revenue january 1 2018 chevron adopted asu 201409 revenue contracts customers topic 606 related amendments using modified retrospective transition method require restatement prior periods adoption result material change company’s accounting material effect company’s financial position including measurement revenue timing revenue recognition contract assets liabilities related costs significant change presentation excise valueadded similar taxes collected behalf third parties longer presented within “sales operating revenue” consolidated statement income starting 2018 taxes totaled 7861 2018 netted “taxes income” consolidated statement income change presentation impact earnings taxes totaled 7189 6905 2017 2016 respectively company applied optional exemption report unfulfilled performance obligations related contracts terms less one year amount future revenue unfulfilled performance obligations longterm contracts fixed components insignificant year ended december 31 2018 revenue contracts customers presented “sales operating revenue” along activity accounted outside scope asc 606 material line consolidated statement income purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income refer note 13 beginning page 66 additional information company’s segmentation revenue receivables related revenue contracts customers included “accounts notes receivable net” consolidated balance sheet net allowance doubtful accounts net balance receivables 9779 10046 january 1 2018 december 31 2018 respectively items included “accounts notes receivable net” represent amounts due partners share joint venture operating project costs amounts due notes consolidated financial statements millions dollars except pershare amounts others primarily related derivatives leases buysell arrangements product exchanges accounted outside scope asc 606 contract assets related costs reflected “prepaid expenses current assets” contract liabilities reflected “accrued liabilities” “deferred credits noncurrent obligations” consolidated balance sheet amounts items material company’s financial position note 26 financial information earnings 2018 included aftertax gains approximately 630 relating sale certain properties amount approximately 365 265 related downstream upstream respectively earnings 2017 included aftertax gains approximately 1800 relating sale certain properties approximately 850 950 related downstream upstream assets respectively earnings 2018 included aftertax charges approximately 2000 impairments asset writeoffs related upstream earnings 2017 included aftertax charges approximately 900 impairments asset writeoffs related upstream includes 416 45 1 2018 2017 2016 respectively company’s share equity affiliates’ foreign currency effects company 4518 goodwill consolidated balance sheet upstream segment primarily related 2005 acquisition unocal company tested goodwill impairment 2018 impairment required fiveyear financial summary unaudited supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions table costs incurred exploration property acquisitions development1 supplemental information oil gas producing activities unaudited development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 14 beginning page 69 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2018 2017 2016 shown following table net income loss exploration production activities reported page 67 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page 67 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page 88 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page 88 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists company classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved reserves probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods proved undeveloped reserves quantities expected recovered new wells undrilled acreage existing wells relatively major expenditure required recompletion due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager global reserves organization separate upstream operating organization manager global reserves 30 years’ experience working oil gas industry holds undergraduate supplemental information oil gas producing activities unaudited graduate degrees geoscience experience includes various technical management roles providing reserve resource estimates support major capital exploration projects 10 years overseeing oil gas reserves processes named distinguished lecturer american association petroleum geologists active member american association petroleum geologists sepm society sedimentary geologists society petroleum engineers rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain chevron corporation reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s senior leadership team including chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance chevron corporation reserves manual technologies used establishing proved reserves additions 2018 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves end 2018 proved undeveloped reserves totaled 46 billion barrels oilequivalent boe increase 317 million boe yearend 2017 increase due 717 million boe extensions discoveries 69 million boe acquisitions 58 million boe revisions 6 million boe improved recovery partially offset transfer 531 million boe proved developed 2 million boe sales major portion reserve increase attributed companys activities midland delaware basins 2018 investments totaling approximately 10 billion oil gas producing activities 01 billion nonoil gas producing activities expended advance development proved undeveloped reserves asia expenditures year totaled approximately 48 billion primarily related development projects tco affiliate kazakhstan united states accounted 34 billion related primarily various development activities gulf mexico midland delaware basins africa 07 billion expended various offshore development natural gas projects nigeria angola republic congo development activities canada argentina primarily responsible 09 billion expenditures americas reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2018 company held approximately 21 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 600 million boe remained undeveloped five years related gorgon wheatstone projects company completed construction liquefaction facilities develop natural gas field development convert remaining proved undeveloped reserves scheduled supplemental information oil gas producing activities unaudited occur line operating constraints infrastructure optimization africa approximately 300 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos gas projects nigeria affiliates account 12 billion boe proved undeveloped reserves 900 million boe remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion facility constraints annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2018 increases commodity prices positively impacted economic limits oil gas properties resulting proved reserve increases negatively impacted proved reserves due entitlement effects yearend reserves volumes updated circumstances significant changes discussed appropriate reserves sections 2018 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 32 percent 38 percent proved reserve quantities three years ending december 31 2018 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2018 proved reserves company 121 billion boe company’s estimated net proved reserves liquids including crude oil condensate natural gas liquids synthetic oil years 2016 2017 2018 shown table page 98 company’s estimated net proved reserves natural gas shown page 99 noteworthy changes liquids proved reserves 2016 2018 discussed shown table following page revisions 2016 improved field performance various gulf mexico fields including jackst malo san joaquin valley primarily responsible 109 million barrel increase united states entitlement effects mainly responsible 64 million barrel increase tco affiliate kazakhstan asia entitlement effects drilling improved performance across numerous assets resulted 50 million barrel increase 2017 improved field performance various gulf mexico fields including jackst malo tahiti midland delaware basins primarily responsible 280 million barrel increase united states improved field performance various fields including agbami sonam nigeria responsible 79 million barrel increase africa synthetic oil reserves canada decreased 42 million barrels primarily due entitlement effects tco affiliate kazakhstan entitlement effects mainly responsible 53 million barrel decrease 2018 improved field performance various gulf mexico fields midland delaware basins primarily responsible 155 million barrel increase united states improved field performance various fields including agbami nigeria mohobilondo republic congo responsible 68 million barrel increase africa reserves americas increased 60 million barrels primarily due improved field performance hebron field canada asia improved performance across numerous assets resulted 37 million barrel increase tco affiliate kazakhstan entitlement effects mainly responsible 39 million barrel decrease improved recovery 2016 improved recovery increased reserves 293 million barrels primarily due future growth project tco affiliate kazakhstan extensions discoveries 2016 extensions discoveries midland delaware basins primarily responsible 131 million barrel increase united states 2017 extensions discoveries midland delaware basins gulf mexico primarily responsible 458 million barrel increase united states extensions discoveries duvernay shale canada primarily responsible 74 million barrel increase americas 2018 extensions discoveries midland delaware basins primarily responsible 532 million barrel increase united states extensions discoveries duvernay shale canada loma campana argentina primarily responsible 36 million barrel increase americas supplemental information oil gas producing activities unaudited purchases 2017 purchases 33 million barrels asia due contract extension azerichiraggunashli fields azerbaijan 2018 purchases 50 million barrels united states primarily midland delaware basins sales 2016 sales 34 million barrels united states primarily gulf mexico shelf 2017 sales 57 million barrels united states primarily gulf mexico shelf midland delaware basins 2018 sales 32 million barrels united states primarily san joaquin valley net proved reserves crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 291 234 169 south america 72 63 54 2018 2017 2016 respectively reserves associated canada ending reserve balances africa 19 26 31 south america 64 78 87 2018 2017 2016 respectively included yearend reserve quantities related productionsharing contracts psc refer page e7 definition psc pscrelated reserve quantities 12 percent 15 percent 19 percent consolidated companies 2018 2017 2016 respectively supplemental information oil gas producing activities unaudited net proved reserves natural gas ending reserve balances north america south america 582 478 172 281 317 475 2018 2017 2016 respectively ending reserve balances africa south america 799 899 939 110 140 147 2018 2017 2016 respectively total “as sold” volumes 2289 1995 1744 2018 2017 2016 respectively includes reserve quantities related productionsharing contracts psc refer page e7 definition psc pscrelated reserve quantities 10 percent 12 percent 15 percent consolidated companies 2018 2017 2016 respectively noteworthy changes natural gas proved reserves 2016 2018 discussed shown table revisions 2016 development activities primarily wheatstone responsible 853 bcf increase australia net revisions 443 bcf asia primarily due improved field performance china thailand 2017 reservoir performance new seismic data greater gorgon area primarily responsible 15 tcf increase australia improved performance midland delaware basins primarily responsible 670 bcf increase united states sonam field nigeria primarily responsible 184 bcf increase africa 2018 reservoir performance well test surveillance data wheatstone greater gorgon area responsible 10 tcf increase australia bibiyana field bangladesh pattani field thailand primarily responsible 347 bcf increase asia improved performance midland delaware basins primarily responsible 258 bcf increase united states extensions discoveries 2016 extensions discoveries 388 bcf united states primarily appalachian region midland delaware basins 2017 extensions discoveries 14 tcf united states primarily appalachian region midland delaware basins extensions discoveries duvernay shale canada primarily responsible 319 bcf increase americas 2018 extensions discoveries 16 tcf united states primarily appalachian region midland delaware basins supplemental information oil gas producing activities unaudited sales 2016 sales 544 bcf united states primarily gulf mexico shelf michigan midcontinent region 2017 sales 177 bcf united states primarily midland delaware basins sale companys interests trinidad tobago primarily responsible 129 bcf decrease americas table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations includes costs retire existing wells facilities addition future wells facilities necessary produce proved undeveloped reserves estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify pricewaterhousecoopers llp independent registered public accounting firm 2020” 2020 proxy statement incorporated reference annual report form 10k page intentionally left blank financial table contents managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page 32 discussion financial results major operating area three years ended december 31 2019 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil canada china colombia indonesia kazakhstan myanmar mexico nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south korea thailand united kingdom united states venezuela earnings company depend mostly profitability upstream business segment significant factor affecting results operations upstream segment price crude oil determined global markets outside company’s control company’s downstream business crude oil largest cost component refined products company’s objective deliver competitive results stockholder value business environment periods sustained lower prices could result impairment writeoff specific assets future periods cause company adjust operating expenses capital exploratory expenditures along measures intended improve financial performance similarly impairments writeoffs may occur result managerial decisions progress certain projects companys portfolio effective tax rate company change substantially periods significant earnings volatility due mix effects impacted absolute level earnings losses whether arise higher lower tax rate jurisdictions result decline increase effective income tax rate one period may indicative expected results future periods note 15 provides company’s effective income tax rate last three years refer “cautionary statements relevant forwardlooking information” page 2 “risk factors” part item 1a pages 18 21 discussion inherent risks could materially impact company’s results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance value growth asset dispositions restructurings may result significant gains losses future periods company’s managements discussion analysis financial condition results operations asset sale program 2018 2020 targeting beforetax proceeds 510 billion proceeds related asset sales 20 billion 2018 28 billion 2019 company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry production inventory levels technology advancements production quotas actions imposed organization petroleum exporting countries opec producers actions regulators weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax applicable laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs support operational goals price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control including limited general level inflation tariffs taxes imposed goods services commoditized prices charged industry’s material service providers spot markets many services materials fell overall industry drilling activity north america declined 2019 particularly onshore however industry activity contracts financial pressure suppliers increased may limit deescalation andor lead consolidation across supplier community impacting costs international offshore rig markets also showing signs weaknesses activity pulled back however pricing products services remains resilient many suppliers reset expectations higher industry spend instead looking higher pricing margins limited scope work chevron utilizes contracts various pricing mechanisms may delay company’s costs reflect changes market trends capital exploratory expenditures operating expenses could also affected damage production facilities caused severe weather civil unrest delays construction factors chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas majority company’s equity crude production priced based brent benchmark brent price averaged 64 per barrel fullyear 2019 compared 71 2018 brent prices increased first half 2019 due opec production cuts us sanctions iran venezuela prices started decline due heightened concerns slowing macro economy weakening oil demand growth amid trade tensions managements discussion analysis financial condition results operations us china opec announced additional production cuts december 2019 leading price increase brent prices 67 end year midfebruary 2020 brent price 57 per barrel declined 10 percent since december 2019 primarily due concerns demand erosion following coronavirus outbreak wti price averaged 57 per barrel fullyear 2019 compared 65 2018 wti traded discount brent throughout 2019 differentials brent ranged 4 10 2019 primarily due pipeline infrastructure constraints restricted flows inland crude export outlets gulf coast variability factors impacting supply demand benchmark crude also affect price differential midfebruary 2020 wti price 52 per barrel chevron interests production heavy crude oil california indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china see page 37 company’s average us international crude oil sales prices contrast price movements global market crude oil price changes natural gas closely aligned seasonal supplyanddemand infrastructure conditions local markets united states prices henry hub averaged 253 per thousand cubic feet mcf 2019 compared 312 2018 midfebruary 2020 henry hub spot price 184 per mcf increased production permian basin resulted insufficient gas pipeline fractionation capacity nearterm oversupply conditions leading depressed natural gas natural gas liquids prices west texas sizable portion chevron’s us natural gas production comes permian basin resulting natural gas realizations significantly lower henry hub price outside united states price changes natural gas depend wide range supply demand regulatory circumstances chevron sells natural gas domestic pipeline market many locations chevron invested longterm projects produce liquefy natural gas transport tanker markets company’s longterm contract prices liquefied natural gas lng typically linked crude oil prices equity lng offtake operated australian lng projects committed binding longterm contracts remainder sold asian spot lng market asian spot market reflects supply demand lng pacific basin directly linked crude oil prices international natural gas realizations averaged 583 per mcf 2019 compared 629 per mcf 2018 see page 37 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2019 averaged 3058 million barrels per day 15 percent company’s net oilequivalent production 2019 occurred opecmember countries angola nigeria republic congo venezuela opec quotas material effect company’s net crude oil production 2019 2018 company estimates net oilequivalent production 2020 grow 3 percent compared 2019 assuming brent crude oil price 60 per barrel excluding impact anticipated 2020 asset sales estimate subject many factors uncertainties including quotas actions may imposed opec tariffs trade sanctions price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction reservoir performance greaterthanexpected declines production mature fields startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds disruptions operations outlook future production levels also affected size number economic investment opportunities time lag initial exploration beginning production company increased investment emphasis shortcycle projects partitioned zone saudi arabia kuwait production shutin beginning may 2015 result difficulties securing work equipment permits net oilequivalent production partitioned zone 2014 81000 barrels per day 2015 net oilequivalent production averaged 28000 barrels per day december 2019 governments saudi arabia kuwait signed memorandum understanding resolve dispute allow production restart partitioned zone midfebruary 2020 prestartup activities commenced financial effects loss production 2019 significant expected significant 2020 chevron interests venezuelan crude oil production assets operated independent equity affiliates operating environment venezuela deteriorating time equity affiliates continued operate consistent authorization provided pursuant general licenses issued united states government remains uncertain environment venezuela stabilize company remains committed personnel operations managements discussion analysis financial condition results operations venezuela refer note 22 page 88 heading “other contingencies” information company’s activities venezuela net proved reserves consolidated companies affiliated companies totaled 114 billion barrels oilequivalent yearend 2019 decrease 5 percent yearend 2018 reserve replacement ratio 2019 44 percent 5 10 year reserve replacement ratios 106 percent 101 percent respectively refer table v beginning page 96 tabulation company’s proved net oil gas reserves geographic area beginning 2017 yearend 2017 2019 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2019 refer “results operations” section pages 32 34 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets changes tax laws regulations company’s significant marketing areas west coast gulf coast united states asia chevron operates significant ownership interests refineries areas refer “results operations” section pages 32 34 additional discussion company’s downstream operations consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies managements discussion analysis financial condition results operations operating developments key operating developments events 2019 early 2020 included following upstream azerbaijan signed agreement sell company’s interest azerichiraggunashli fields bakutbilisiceyhan pipeline brazil completed sale interest frade field denmark completed sale denmark upstream interests philippines signed agreement sell company’s interest malampaya field late october united kingdom completed sale interest rosebank field united kingdom completed sale central north sea assets united states announced sanction waterflood project st malo field gulf mexico united states announced final investment decision anchor field gulf mexico downstream united states completed acquisition refinery pasadena texas australia signed agreement acquire network terminals service stations cpchem announced agreements jointly develop petrochemical complexes qatar us gulf coast common stock dividends 2019 annual dividend 476 per share making 2019 32nd consecutive year company increased annual per share dividend payout january 2020 company’s board directors approved 010 per share increase quarterly dividend 129 per share payable march 2020 representing increase 84 percent common stock repurchase program company purchased 4 billion common stock 2019 stock repurchase programs company currently expects repurchase 5 billion common stock 2020 results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 12 beginning page 68 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages 28 32 refer “selected operating data” table page 37 threeyear comparison production volumes refined product sales volumes refinery inputs discussion variances 2018 2017 found “results operations” section pages 32 34 company’s 2018 annual report form 10k filed sec february 22 2019 managements discussion analysis financial condition results operations us upstream us upstream recorded loss 509 billion 2019 compared earnings 328 billion 2018 decrease earnings largely due 817 billion 2019 impairment charges primarily associated appalachia shale big foot partially offset absence 2018 writeoffs impairments 660 million largely due tigris project gulf mexico also contributing decrease lower crude oil natural gas prices 172 billion higher operating expenses 260 million absence several 2018 asset sale gains totaling 220 million partially offset higher crude oil natural gas production 133 billion company’s average realization us crude oil natural gas liquids 2019 4854 per barrel compared 5817 2018 average natural gas realization 109 per thousand cubic feet 2019 compared 186 2018 net oilequivalent production 2019 averaged 929000 barrels per day 17 percent 2018 production increase largely due shale tight properties permian basin texas new mexico net liquids component oilequivalent production 2019 averaged 724000 barrels per day 17 percent 2018 net natural gas production averaged 123 billion cubic feet per day 2019 18 percent 2018 international upstream international upstream earnings 767 billion 2019 compared 1004 billion 2018 lower crude oil natural gas realizations 14 billion 830 million respectively partially offset lower depreciation tax expenses 560 million 280 million respectively also number special items largely offset 2019 2018 included 2019 earnings items totaling 800 million writeoffs impairment charges 22 billion associated kitimat lng gas projects partially offset gain 12 billion sale uk central north sea assets benefit 180 million related reduction corporate income tax rate alberta canada offsetting items absence 2018 special items 920 million associated impairments writeoffs receivable writedown contractual settlement foreign currency effects unfavorable impact earnings 868 million periods managements discussion analysis financial condition results operations company’s average realization international crude oil natural gas liquids 2019 5814 per barrel compared 6425 2018 average natural gas realization 583 per thousand cubic feet 2019 compared 629 2018 international net oilequivalent production 213 million barrels per day 2019 essentially unchanged 2018 production increases wheatstone major capital projects offset normal field declines impact asset sales 2019 net liquids component international oilequivalent production 114 million barrels per day 2019 2 percent 2018 international net natural gas production 593 billion cubic feet per day 2019 increased 1 percent 2018 us downstream us downstream earned 156 billion 2019 compared 210 billion 2018 decrease primarily due lower margins refined product sales 300 million lower equity earnings 50 percentowned cpchem 140 million higher depreciation expense 100 million following first production new hydrogen plant richmond refinery total refined product sales 125 million barrels per day 2019 3 percent 2018 international downstream international downstream earned 922 million 2019 compared 170 billion 2018 decrease earnings due lower margins refined product sales 570 million lower gains asset sales 300 million primarily due absence 2018 gains southern africa asset sale partially offset favorable tax items 100 million foreign currency effects unfavorable impact earnings 54 million periods total refined product sales 133 million barrels per day 2019 8 percent 2018 primarily due sale southern africa refining marketing business third quarter 2018 consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2019 decreased 157 million 2018 change periods mainly due receipt anadarko merger termination fee partially offset higher tax items foreign currency effects decreased net charges 7 million periods consolidated statement income comparative amounts certain income statement categories shown discussion variances 2018 2017 found “consolidated statement income” section pages 34 36 company’s 2018 annual report form 10k sales operating revenues decreased 2019 mainly due lower refined product crude oil natural gas prices lower crude oil refined product volumes managements discussion analysis financial condition results operations income equity affiliates decreased 2019 mainly due lower upstreamrelated earnings tengizchevroil kazakhstan petroboscan petropiar venezuela lower downstreamrelated earnings gs caltex south korea addition two upstream affiliates writtendown 2019 refer note 13 beginning page 71 discussion chevron’s investments affiliated companies income increased 2019 mainly due receipt anadarko merger termination fee higher gains asset sales partially offset unfavorable swings foreign currency effects crude oil product purchases decreased 145 billion 2019 primarily due lower crude oil volumes prices lower product prices volumes operating selling general administrative expenses increased 11 billion 2019 increase mainly due higher services fees materials supplies expense higher transportation expense partially offset absence 2018 receivable writedown contractual settlement exploration expenses 2019 decreased primarily due lower charges well writeoffs partially offset higher geological geophysical expenses depreciation depletion amortization expenses increased 2019 mainly due higher impairments production well writeoffs partially offset lower rates taxes income decreased 2019 mainly due lower local municipal taxes licenses result company’s divestment downstream interest southern africa third quarter 2018 partially offset higher us state carbon emissions regulatory expenses interest debt expenses increased 2019 mainly due lower capitalized interest partially offset lower interest expense resulting lower debt balances decrease income tax expense 2019 302 billion due decrease total income tax company 1504 billion decrease income taxes company primarily result upstream impairment project writeoff charges along lower commodity prices partially offset higher gains asset sales us income tax decreased profit 473 billion 2018 loss 548 billion 2019 decrease earnings tax primarily driven effect upstream impairments lower crude oil natural gas prices managements discussion analysis financial condition results operations partially offset anadarko merger termination fee higher production us tax decreased tax charge 724 million 2018 tax benefit 117 billion 2019 primarily due beforetax loss international income tax decreased 1584 billion 2018 1102 billion 2019 decrease primarily driven effects upstream project writeoff impairment charges lower crude oil natural gas prices partially offset gains asset sales lower beforetax income primarily drove 113 billion decrease international income tax expense 499 billion 2018 386 billion 2019 refer also discussion effective income tax rate note 15 beginning page 74 managements discussion analysis financial condition results operations selected operating data12 managements discussion analysis financial condition results operations liquidity capital resources sources uses cash strength company’s balance sheet enabled fund timing differences throughout year cash inflows outflows cash equivalents marketable securities time deposits total balances 57 billion 103 billion december 31 2019 2018 respectively cash provided operating activities 2019 273 billion compared 306 billion 2018 primarily due lower crude oil prices cash provided operating activities net contributions employee pension plans approximately 14 billion 2019 10 billion 2018 cash provided investing activities included proceeds deposits related asset sales 28 billion 2019 20 billion 2018 restricted cash 12 billion 11 billion december 31 2019 2018 respectively held cash shortterm marketable securities recorded “deferred charges assets” “prepaid expenses current assets” consolidated balance sheet amounts generally associated upstream decommissioning activities tax payments funds held escrow taxdeferred exchanges refundable deposits related pending asset sales dividends paid common stockholders 90 billion 2019 85 billion 2018 debt finance lease liabilities total debt finance lease liabilities 270 billion december 31 2019 345 billion yearend 2018 75 billion decrease total debt finance lease liabilities 2019 primarily due repayment longterm notes totaling 50 billion matured 2019 reduction commercial paper company’s debt finance lease liabilities due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 130 billion december 31 2019 compared 156 billion yearend 2018 amounts 975 billion 99 billion reclassified longterm debt end 2019 2018 respectively yearend 2019 settlement obligations expected require use working capital 2020 company intent ability evidenced committed credit facilities refinance longterm basis chevron automatic shelf registration statement expires may 2021 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation rated aa managements discussion analysis financial condition results operations standard poor’s corporation aa2 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations cash may generated asset dispositions capital program shareholder distributions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company also modify capital spending plans discontinue curtail stock repurchase program provide flexibility continue paying common stock dividend also remain committed retaining company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 17 shortterm debt page 78 common stock repurchase program january 2019 company purchased shares 03 billion july 2010 stock repurchase program february 1 2019 company announced board directors authorized new stock repurchase program maximum dollar limit 25 billion set term limits december 31 2019 company purchased total 311 million shares 37 billion resulting 213 billion remaining program authorized february 2019 company currently expects repurchase 5 billion common stock 2020 repurchases may made time open market block purchases privately negotiated transactions manner determined company timing repurchases actual amount repurchased depend variety factors including market price company’s shares general market economic conditions factors stock repurchase program obligate company acquire particular amount common stock may suspended discontinued time capital exploratory expenditures capital exploratory expenditures business segment 2019 2018 2017 follows total expenditures 2019 210 billion including 61 billion company’s share equityaffiliate expenditures require cash outlays company 2018 expenditures 201 billion including company’s share affiliates’ expenditures 57 billion 210 billion expenditures 2019 85 percent 178 billion related upstream activities approximately 88 percent expended upstream operations 2018 international upstream accounted 54 percent worldwide upstream investment 2019 60 percent 2018 company estimates 2020 organic capital exploratory expenditures 20 billion including 62 billion spending affiliates line 2019 expenditures reflects robust portfolio upstream downstream investments highlighted company’s permian basin position additional shale tight development basins approximately 84 percent total 168 billion budgeted exploration production activities approximately 11 billion planned upstream capital spending relates base producing assets including 4 billion permian 1 billion shale tight rock investments approximately 5 billion upstream program planned major capital projects underway including 4 billion associated future growth wellhead pressure management project tengiz field kazakhstan global exploration funding expected 1 billion remaining upstream spend budgeted early stage projects supporting potential future developments company monitors crude oil market conditions able adjust future capital outlays oil price conditions deteriorate worldwide downstream spending 2020 estimated 28 billion 16 billion estimated projects united states investments technology businesses corporate operations 2020 budgeted 04 billion managements discussion analysis financial condition results operations noncontrolling interests company noncontrolling interests 10 billion december 31 2019 11 billion december 31 2018 distributions noncontrolling interests totaled 18 million 91 million 2019 2018 respectively pension obligations information related pension plan contributions included beginning page 82 note 21 employee benefit plans heading “cash contributions benefit payments” financial ratios metrics following represent several metrics company believes useful measures monitor financial health company performance time current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2019 book value inventory lower replacement costs based average acquisition costs year approximately 45 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2019 lower 2018 due lower income free cash flow cash provided operating activities less cash capital expenditures represents cash available creditors investors investing business debt ratio total debt percentage total debt plus chevron corporation stockholders’ equity indicates company’s leverage company’s debt ratio 158 percent yearend 2019 compared 182 percent yearend 2018 managements discussion analysis financial condition results operations net debt ratio total debt less cash equivalents time deposits marketable securities percentage total debt less cash equivalents time deposits marketable securities plus chevron corporation stockholders’ equity indicates company’s leverage net cash balances capital employed sum chevron corporation stockholders’ equity total debt noncontrolling interests represents net investment business return average capital employed roce net income attributable chevron adjusted aftertax interest expense noncontrolling interest divided average capital employed average capital employed computed averaging sum capital employed beginning end year roce ratio intended measure annual earnings percentage historical investments business return stockholders’ equity rose net income attributable chevron divided average chevron corporation stockholders’ equity average stockholder’s equity computed averaging sum stockholder’s equity beginning end year rose ratio intended measure earnings percentage shareholder investments managements discussion analysis financial condition results operations offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements information related matters included page 87 note 22 contingencies commitments following table summarizes company’s significant contractual obligations excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 21 beginning page 82 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 975 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20212022 period amounts represent principal balance excludes finance lease liabilities include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices direct guarantees additional information related guarantees included page 87 note 22 contingencies commitments indemnifications information related indemnifications included page 87 note 22 contingencies commitments financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2019 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies company’s risk management practices compliance policies reviewed audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2019 material company’s results operations company uses monte carlo simulation method valueatrisk var model estimate maximum potential loss fair value 95 confidence level oneday holding period effect adverse changes market managements discussion analysis financial condition results operations conditions derivative commodity instruments held issued based inputs var company’s primary risk exposures area derivative commodity instruments december 31 2019 2018 material company’s cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2019 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2019 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” page 71 note 13 investments advances discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page 72 note 14 heading “mtbe” ecuador information related ecuador matters included note 14 heading “ecuador” beginning page 72 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 128 billion asset retirement obligations yearend 2019 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise decommission facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron company’s 2019 environmental expenditures refer note 22 page 87 additional discussion environmental remediation provisions yearend reserves refer also note 23 page 89 additional discussion company’s asset retirement obligations suspended wells information related suspended wells included note 19 accounting suspended exploratory wells beginning page 79 income taxes information related income tax contingencies included pages 74 76 note 15 page 87 note 22 heading “income taxes” contingencies information related contingencies included page 88 note 22 consolidated financial statements heading “other contingencies” managements discussion analysis financial condition results operations environmental matters company subject various international federal state local environmental health safety laws regulations marketbased programs laws regulations programs continue evolve expected increase number complexity time govern manner company conducts operations also products sells example international agreements national regional state legislation regulatory measures aim limit reduce greenhouse gas ghg emissions currently various stages implementation consideration ghg issues responses issues international agreements national regional state legislation regulations integrated company’s strategy planning capital investment reviews risk management tools processes applicable also factored company’s longrange supply demand energy price forecasts reflect longrange effects renewable fuel penetration energy efficiency standards climaterelated policy actions demand response oil natural gas prices addition legislation regulations intended address hydraulic fracturing also continue evolve national state local levels refer “risk factors” part item 1a pages 18 21 discussion inherent risks increasingly restrictive environmental regulation could materially impact company’s results operations financial condition costs complying existing laws regulations pertaining company operations products embedded normal costs business however possible predict certainty amount additional investments new existing technology facilities amounts increased operating costs incurred future prevent control reduce eliminate releases hazardous materials pollutants environment remediate restore areas damaged prior releases hazardous materials comply new environmental laws regulations although costs may significant results operations single period company presently expect material adverse effect company’s liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2019 approximately 20 billion consolidated companies included expenditures approximately 06 billion environmental capital expenditures 14 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites decommissioning restoration sites 2020 total worldwide environmental capital expenditures estimated 04 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application accounting principles generally accepted united states america gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows managements discussion analysis financial condition results operations oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevron’s estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevron’s consolidated financial statements using successful efforts method accounting include following 1 amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2019 chevron’s uop depreciation depletion amortization dda oil gas properties 142 billion proved developed reserves beginning 2019 63 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2019 would increased approximately 700 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page 96 changes proved reserve estimates three years ended december 31 2019 table vii “changes standardized measure discounted future net cash flows proved reserves” page 103 estimates proved reserve values three years ended december 31 2019 oil gas reserves commentary read conjunction properties plant equipment section note 1 beginning page 57 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions generally consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 16 page 77 section properties plant equipment note 1 “summary significant accounting policies” beginning page 57 company routinely performs impairment reviews triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision company’s crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets addition impairments could occur due changes national state local environmental regulations laws including designed stop impede development production oil gas also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group managements discussion analysis financial condition results operations disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value occurs determination must made whether loss otherthantemporary case investment impaired number differing assumptions potentially affecting whether investment impaired period amount impairment sensitivity analysis practicable 2019 company recorded impairments writeoffs certain oil gas properties following review approval business plan capital expenditure program result company’s disciplined approach capital allocation downward revision longerterm commodity price outlook company reduce funding various natural gasrelated upstream opportunities including appalachia shale kitimat lng international projects addition revised longterm oil price outlook resulted impairment big foot individually material impairments ppe investments recorded 2018 2017 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired resulted larger impacts impaired assets asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2019 practicable given broad range company’s longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 23 page 89 additional discussions asset retirement obligations pension postretirement benefit plans note 21 beginning page 82 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page 84 note 21 relevant headings actual rates may vary significantly estimates unanticipated changes beyond company’s control 2019 company used expected longterm rate return 675 percent discount rate service costs 44 percent discount rate interest cost 37 percent us pension plans actual return 2019 183 percent 10 years ended december 31 2019 actual asset returns averaged 81 percent plans additionally exception three years within 10year period actual asset returns plans equaled exceeded 675 percent year total pension expense 2019 09 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 59 percent companywide pension expense would reduced total pension plan expense 2019 approximately 79 million 1 percent increase discount rates plan would reduced pension expense 2019 approximately 197 million aggregate funded status recognized december 31 2019 net liability approximately 52 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2019 company used discount rate 31 percent measure obligations us pension plans indication managements discussion analysis financial condition results operations sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 62 percent companywide pension obligation would reduced plan obligation approximately 401 million would decreased plan’s underfunded status approximately 25 billion 21 billion company’s opeb plans expense 2019 101 million total liability unfunded end 2019 25 billion main us opeb plan company used discount rate service cost 45 percent discount rate interest cost 39 percent measure expense 2019 31 percent discount rate measure benefit obligations december 31 2019 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2019 opeb expense opeb liabilities end 2019 information sensitivity health care costtrend rate refer page 84 note 21 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page 83 note 21 description method used amortize 65 billion beforetax actuarial losses recorded company december 31 2019 estimate costs recognized expense 2020 addition information related company contributions included page 86 note 21 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 22 beginning page 87 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2019 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss information refer “changes management’s estimates assumptions may material impact company’s consolidated financial statements financial operational performance given period” “risk factors” part item 1a page 21 new accounting standards refer note 4 beginning page 62 information regarding new accounting standards quarterly results unaudited consolidated statement income millions dollars except pershare amounts consolidated statement comprehensive income millions dollars consolidated balance sheet millions dollars except pershare amounts consolidated statement cash flows millions dollars consolidated statement equity amounts millions dollars notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates circumstances change additional information becomes known subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income consolidated statement equity fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 inputs quoted prices active markets identical assets liabilities level 2 inputs quoted prices included within level 1 directly indirectly observable asset liability level 3 inputs observable market derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories primarily stated cost net realizable value properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved notes consolidated financial statements millions dollars except pershare amounts reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page 79 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net cash flows proved crude oil natural gas properties company performs impairment reviews country concession psc development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 7 beginning page 65 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 23 page 89 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced impairments capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize finance lease rightofuse assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annually december 31 frequently event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 23 page 89 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current notes consolidated financial statements millions dollars except pershare amounts regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition company accounts delivery order crude oil natural gas petroleum chemical products separate performance obligation revenue recognized performance obligation satisfied typically occurs point time control product transfers customer payment generally due within 30 days delivery company accounts delivery transportation fulfillment cost separate performance obligation recognizes costs operating expense period revenue related commodity recognized revenue measured amount company expects receive exchange transferring commodities customer company’s commodity sales typically based prevailing marketbased prices may include discounts allowances market prices become known terms company’s contracts transaction price included revenue based company’s estimate likely outcome discounts allowances estimated using combination historical recent data trends deliveries contain multiple products observable standalone selling price generally used measure revenue product company includes estimates transaction price extent significant reversal revenue probable subsequent periods excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented net basis “taxes income” consolidated statement income page 52 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income prior adoption asc 606 january 1 2018 revenues associated sales crude oil natural gas petroleum chemicals products sources recorded title passed customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement company’s longterm incentive plan ltip awards include stock options stock appreciation rights graded vesting provisions onethird award vests first second third anniversaries date grant addition performance shares granted company’s ltip vest end threeyear performance period awards granted company’s ltip beginning 2017 stock options stock appreciation rights graded vesting one third award vests annually january 31 first anniversary grant date standard restricted stock unit awards cliff vesting total award vest january 31 fifth anniversary grant date subject adjustment upon termination pursuant satisfaction certain criteria company amortizes awards straightline basis notes consolidated financial statements millions dollars except pershare amounts note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ended december 31 2019 reflected table amounts net tax refer note 21 beginning page 82 reclassified components totaling 523 included employee benefit costs year ended december 31 2019 related income taxes period totaling 117 reflected income tax expense consolidated statement income reclassified amounts insignificant stranded tax reclassification retained earnings per asu 201802 notes consolidated financial statements millions dollars except pershare amounts note 3 information relating consolidated statement cash flows consolidated statement cash flows excludes changes consolidated balance sheet affect cash “other” line operating activities section includes changes postretirement benefits obligations longterm liabilities consolidated statement cash flows excludes changes consolidated balance sheet affect cash “depreciation depletion amortization” “deferred income tax provision” “dry hole expense” collectively include approximately 93 billion 11 billion noncash reductions recorded 2019 2018 respectively relating impairments noncash charges refer also note 23 page 89 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2019 notes consolidated financial statements millions dollars except pershare amounts major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash movements 239 2019 25 2018 1183 2017 table quantifies beginning ending balances restricted cash restricted cash equivalents consolidated balance sheet note 4 new accounting standards leases topic 842 effective january 1 2019 chevron adopted accounting standards update asu 201602 related amendments additional information company’s leases refer note 5 beginning page 62 financial instruments credit losses topic 326 june 2016 fasb issued asu 201613 becomes effective company beginning january 1 2020 standard requires companies use forwardlooking information calculate credit loss estimates company completed accounting policy work process changes necessary meet standard’s requirements company expect implementation standard material effect consolidated financial statements note 5 lease commitments chevron implemented new lease standard effective date january 1 2019 cumulativeeffect adjustment opening balance 2019 retained earnings de minimis company elected option apply transition provisions adoption date instead earliest comparative period presented financial statements making election company applied retrospective reporting comparable periods company elected shortterm lease exception provided standard therefore recognizes rightofuse assets lease liabilities leases term greater one year company elected package practical expedients reevaluate existing contracts containing lease classification unless previously assessed lease criteria addition company reassess initial direct costs existing leases company applied land easement practical expedient company elected practical expedient separate nonlease components lease components asset classes except certain asset classes significant nonlease ie service components company assessed contracts including drill ships drilling rigs storage tanks previously assessed lease criteria operating leases new standard increasing lease commitments approximately 2 billion company enters leasing arrangements lessee lessor arrangements significant leases classified operating finance leases operating finance leases recognize lease liabilities associated rightofuse assets operating lease arrangements mainly involve drill ships drilling rigs time chartered vessels bareboat charters terminals notes consolidated financial statements millions dollars except pershare amounts exploration production equipment office buildings warehouses land finance leases primarily include facilities vessels chevron uses various assumptions judgments preparing quantitative data qualitative information material company’s overall lease population leases used joint ventures company recognizes 100 rightofuse assets lease liabilities company sole signatory lease cases company operator joint venture lease costs reflect costs associated operator’s working interest share lease term includes committed lease term identified contract taking account renewal termination options management reasonably certain exercise company uses incremental borrowing rate proxy discount rate based term lease unless implicit rate available details rightofuse assets lease liabilities operating finance leases including balance sheet presentation follows 1 capitalized leased assets 818 primarily upstream segment accumulated amortization 617 december 31 2018 2 includes noncash additions 1201 184 rightofuse assets obtained exchange new modified lease liabilities 2019 operating finance leases respectively total lease costs consist amounts recognized consolidated statement income period amounts capitalized part cost another asset total lease costs incurred operating finance leases follows 1 net rental expense 816 721 2018 2017 respectively 2 includes variable shortterm lease costs cash paid amounts included measurement lease liabilities follows notes consolidated financial statements millions dollars except pershare amounts december 31 2019 estimated future undiscounted cash flows operating finance leases follows additionally company 790 future undiscounted cash flows operating leases yet commenced leases primarily drill ship facility bareboat charter drilling rig leasing arrangements underlying asset yet constructed lessor primarily involved design construction asset december 31 2018 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows excluded table executed notyetcommenced capital lease payments 14 15 22 21 219 2019 2020 2021 2022 2023 thereafter respectively note 6 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows notes consolidated financial statements millions dollars except pershare amounts note 7 fair value measurements tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2019 december 31 2018 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2019 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company reported impairments certain upstream properties 2019 primarily due capital allocation decisions lower longterm commodity price outlook company individually material impairments 2018 investments advances company reported impairments certain upstream equity companies 2019 primarily due capital allocation decisions lower longterm commodity price outlook company individually material impairments investments advances 2018 assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 5686 9342 notes consolidated financial statements millions dollars except pershare amounts december 31 2019 december 31 2018 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values zero 950 december 31 2019 december 31 2018 respectively fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2019 “cash equivalents” include investments carryingfair value 1225 1139 december 31 2019 december 31 2018 respectively december 31 2019 investments classified level 1 include restricted funds related certain upstream decommissioning activities refundable deposits held escrow related pending asset sales tax payments financing program reported “deferred charges assets” consolidated balance sheet longterm debt excluding finance lease liabilities 13659 18706 december 31 2019 december 31 2018 respectively estimated fair values 14326 18729 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 13460 classified level 1 fair value longterm debt 866 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2019 2018 material note 8 financial derivative instruments derivative commodity instruments company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2019 december 31 2018 december 31 2017 classification consolidated balance sheet consolidated statement income consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2019 december 31 2018 notes consolidated financial statements millions dollars except pershare amounts consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions “a right offset” concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers note 9 assets held sale december 31 2019 company classified 3411 net properties plant equipment “assets held sale” consolidated balance sheet assets associated upstream operations anticipated sold next 12 months revenues earnings contributions assets 2019 material note 10 equity retained earnings december 31 2019 2018 included 25319 22362 respectively company’s share undistributed earnings equity affiliates december 31 2019 72 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron longterm incentive plan addition 688303 shares remain available issuance 1600000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 11 earnings per share basic earnings per share eps based upon “net income loss attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 20 “stock options sharebased compensation” beginning page 80 table following page sets forth computation basic diluted eps notes consolidated financial statements millions dollars except pershare amounts note 12 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology activities company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states notes consolidated financial statements millions dollars except pershare amounts segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments receivables assets yearend 2019 2018 follows segment sales operating revenues operating segment sales operating revenues including internal transfers years 2019 2018 2017 presented table next page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil “all other” activities include revenues insurance operations real estate activities technology companies notes consolidated financial statements millions dollars except pershare amounts 1 united states country accounted 10 percent company’s sales operating revenues segment income taxes segment income tax expense years 2019 2018 2017 follows segment information additional information segmentation major equity affiliates contained note 13 page 71 information related properties plant equipment segment contained note 16 page 77 notes consolidated financial statements millions dollars except pershare amounts note 13 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2019 company’s carrying value investment tco 110 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets included investment loan tco fund development future growth wellhead pressure management project balance 3350 petropiar chevron 30 percent interest petropiar joint stock company operates heavy oil huyapari field upgrading project venezuela’s orinoco belt december 31 2019 company’s carrying value investment petropiar approximately 130 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela december 31 2019 company’s carrying value investment petroboscan approximately 90 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets company also outstanding longterm loan petroboscan 566 yearend 2019 caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company investments advances totaling 883 includes longterm loans 199 yearend 2019 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns notes consolidated financial statements millions dollars except pershare amounts angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals lubricants predominantly south korea information “sales operating revenues” consolidated statement income includes 8006 10378 8165 affiliated companies 2019 2018 2017 respectively “purchased crude oil products” includes 5694 6598 4800 affiliated companies 2019 2018 2017 respectively “accounts notes receivable” consolidated balance sheet includes 810 884 due affiliated companies december 31 2019 2018 respectively “accounts payable” includes 506 631 due affiliated companies december 31 2019 2018 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron’s net loans affiliates 4331 3402 3853 december 31 2019 2018 2017 respectively note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party six pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador background chevron defendant civil litigation proceedings stemming lawsuit filed superior court province nueva loja lago agrio ecuador may 2003 plaintiffs claim representatives residents area oil production consortium formerly operated lawsuit alleged harm environment consortium’s oil production activities sought monetary damages relief texaco petroleum company texpet subsidiary texaco inc minority member consortium 1967 1992 stateowned petroecuador majority partner since 1992 petroecuador sole owner operator concession area termination consortium following independent thirdparty environmental audit concession area 1995 texpet entered formal agreement republic ecuador petroecuador texpet agreed remediate specific sites assigned government proportion texpet’s minority share consortium pursuant agreement texpet conducted threeyear remediation program certifying assigned sites properly remediated 1998 ecuador granted texpet related corporate entities full release environmental liability arising consortium operations chevron defended lago agrio lawsuit grounds claims lacked legal factual merit matters law chevron asserted court lacked jurisdiction plaintiffs sought improperly apply 1999 law notes consolidated financial statements millions dollars except pershare amounts retroactively claims timebarred lawsuit barred releases signed republic ecuador petroecuador pertinent provincial municipal governments regard facts company asserted evidence confirmed texpet’s remediation properly conducted remaining environmental impacts reflected petroecuador’s failure timely fulfill legal obligation remediate concession area petroecuador’s conduct assumed control operations february 2011 provincial court rendered judgment chevron awarding approximately 8600 damages plus approximately 900 plaintiffs’ representatives approximately 8600 additional punitive damages unless company issued public apology within 15 days chevron january 2012 appellate panel affirmed judgment ordered chevron pay additional 010 attorneys’ fees november 2013 ecuador’s national court justice ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 2013 chevron appealed decision ecuador’s highest constitutional court rejected chevron’s appeal july 2018 appeals available ecuador lago agrio plaintiffs’ lawyers sought enforce judgment ecuador jurisdictions may 2012 filed recognition enforcement action chevron corporation chevron canada limited another subsidiary later dismissed party superior court justice ontario canada september 2015 supreme court canada ruled ontario superior court justice jurisdiction chevron corporation chevron canada limited purposes action january 2017 superior court ruled chevron canada limited chevron corporation separate legal entities separate rights obligations dismissed action chevron canada limited may 2018 court appeal ontario upheld dismissal chevron canada limited supreme court canada denied plaintiffs’ application leave appeal april 2019 rendering dismissal chevron canada limited final july 2019 consent parties ontario superior court dismissed recognition enforcement action chevron corporation prejudice costs favor chevron june 2012 plaintiffs filed recognition enforcement action chevron corporation superior court justice brasilia brazil may 2015 brazilian public prosecutor issued opinion recommending court reject plaintiffs’ action grounds including lago agrio judgment procured fraud corruption violated brazilian international public order november 2017 superior court justice dismissed plaintiffs’ recognition enforcement action jurisdictional grounds june 2018 dismissal became final brazil october 2012 provincial court ecuador issued ex parte embargo order purporting order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 2012 request plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary january 2013 appellate court upheld freeze order june 2013 supreme court argentina revoked freeze order entirety december 2013 chevron served plaintiffs’ complaint seeking recognition enforcement judgment argentina april 2016 public prosecutor argentina issued opinion recommending rejection plaintiffs’ request recognize ecuadorian judgment argentina november 2017 national court first instance dismissed complaint jurisdictional grounds federal civil court appeals affirmed dismissal july 2018 plaintiffs’ appeal supreme court argentina remains pending chevron continues believe ecuadorian judgment illegitimate unenforceable product fraud corruption contrary law legitimate scientific evidence chevron cannot predict timing outcome pending threatened enforcement action expects continue vigorous defense imposition liability contest defend enforcement actions february 2011 chevron filed civil lawsuit us district court southern district new york lago agrio plaintiffs several lawyers supporters asserting violations racketeer influenced corrupt organizations rico act state law march 2014 district court entered judgment favor chevron finding ecuadorian judgment procured fraud bribery corruption prohibiting rico defendants seeking enforce lago agrio judgment united states profiting illegal acts august 2016 us court appeals second circuit issued unanimous decision affirming new york judgment full june 2017 us supreme court denied rico defendants’ petition writ certiorari rendering new york judgment favor chevron final chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal administered permanent court arbitration hague rules united nations commission international trade law claim alleged violations ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements ecuador texpet january 2012 tribunal issued first interim measures award requiring ecuador take measures disposal suspend cause suspended enforcement recognition within outside ecuador judgment chevron lago agrio case pending order tribunal february 2012 tribunal issued second notes consolidated financial statements millions dollars except pershare amounts interim award mandating ecuador take measures necessary suspend cause suspended enforcement recognition proceedings within outside ecuador also february 2012 tribunal issued third interim award confirming jurisdiction hear chevron texpet’s claims february 2013 tribunal issued fourth interim award declared ecuador violated first second interim awards tribunal divided merits phase arbitration three phases september 2013 conclusion phase one tribunal issued first partial award finding settlement agreements ecuador texpet applied texpet chevron released public environmental claims arising consortium’s operations preclude individual claims personal harm august 2018 tribunal issued phase two award favor chevron texpet tribunal unanimously held lago agrio judgment procured fraud bribery corruption based public claims ecuador settled released according tribunal ecuadorian judgment “violates international public policy” “should recognized enforced courts states” tribunal found ecuador breached obligations settlement agreements releasing texpet affiliates public environmental claims ii ecuador committed denial justice international law violated usecuador bit due fraud corruption lago agrio litigation iii texpet satisfied environmental remediation obligations remediation program ecuador supervised approved tribunal ordered ecuador take immediate steps remove status enforceability ecuadorian judgment b take measures “wipe consequences” ecuador’s “internationally wrongful acts regard ecuadorian judgment” c compensate chevron injuries resulting ecuadorian judgment final phase three arbitration damages chevron’s injuries determined set hearing march 2021 ecuador filed district court hague request set aside tribunal’s interim awards first partial award january 2016 court denied ecuador’s request july 2017 appeals court netherlands denied ecuador’s appeal april 2019 supreme court netherlands upheld decision appeals court finally rejected ecuador’s challenges tribunal’s interim awards first partial award december 2018 ecuador filed district court hague request set aside tribunal’s phase two award management’s assessment ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment management believe judgment utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 15 taxes reconciliation us statutory federal income tax rate company’s effective income tax rate detailed table following page notes consolidated financial statements millions dollars except pershare amounts includes onetime tax costs benefits associated changes uncertain tax positions valuation allowances 2019 decrease income tax expense 3024 result yearoveryear decrease total income tax expense primarily due impairment project writeoff charges 2019 company’s effective tax rate changed 28 percent 2018 49 percent 2019 change effective tax rate consequence mix effect resulting absolute level earnings losses whether arose higher lower tax rate jurisdictions including tax charge related cash repatriation impact asset sales corporate rate reductions company records deferred taxes taxjurisdiction basis reported deferred tax balances composed following beginning 2019 deferred taxes consequence asu 201602 included “investments other” “operating lease” balances refer note 5 “lease commitments” beginning page 62 deferred tax liabilities end 2019 decreased approximately 2500 yearend 2018 decrease primarily related property plant equipment temporary differences due upstream asset impairments deferred tax assets essentially unchanged yearend 2018 overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences valuation allowance reduces deferred tax assets amounts management’s assessment likely realized end 2019 company tax loss carryforwards approximately 13419 tax credit carryforwards approximately 1058 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2020 2034 us foreign tax credit carryforwards 9840 expire 2020 2029 notes consolidated financial statements millions dollars except pershare amounts december 31 2019 2018 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely indefinite reinvestment assertion continues apply purpose determining deferred tax liabilities us state foreign withholding tax purposes us state foreign withholding taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 52500 december 31 2019 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount state foreign taxes might payable possible remittance earnings intended reinvested indefinitely company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2019 2018 2017 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included approximately 81 percent 4987 unrecognized tax benefits december 31 2019 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2019 jurisdictions latest years income tax examinations finalized follows united states 2013 nigeria 2000 australia 2009 kazakhstan 2012 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2019 accruals 30 anticipated interest penalty obligations included consolidated balance sheet compared accruals 33 yearend 2018 income tax expense benefit associated interest penalties 3 8 161 2019 2018 2017 respectively notes consolidated financial statements millions dollars except pershare amounts beginning 2018 taxes netted “taxes income” accordance asu 201409 refer note 24 “revenue” beginning page 89 note 16 properties plant equipment1 united states australia country accounted 10 percent company’s net properties plant equipment ppe 2019 australia ppe 51359 53768 55514 2019 2018 2017 respectively net dry hole expense related prior years’ expenditures 124 343 42 2019 2018 2017 respectively depreciation expense includes accretion expense 628 654 668 2019 2018 2017 respectively impairments 10797 735 1021 2019 2018 2017 respectively notes consolidated financial statements millions dollars except pershare amounts note 17 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2019 company interest rate swaps shortterm debt december 31 2019 company 9750 364day committed credit facilities various major banks enable refinancing shortterm obligations longterm basis credit facilities allow company convert amounts outstanding term loan period one year supports commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facility would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facility december 31 2019 company classified 9750 9900 shortterm debt longterm december 31 2019 2018 respectively settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis notes consolidated financial statements millions dollars except pershare amounts note 18 longterm debt total longterm debt including finance lease liabilities december 31 2019 23691 company’s longterm debt outstanding yearend 2019 2018 follows weightedaverage interest rate december 31 2019 interest rate december 31 2019 maturity date conditional upon occurrence certain events 2022 earliest period loan may become payable details finance lease liabilities see note 5 beginning page 62 chevron automatic shelf registration statement expires may 2021 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt excluding finance lease liabilities principal balance 18730 matures follows 2020 5054 2021 2054 2022 4268 2023 3003 2024 1000 2024 3351 see note 7 beginning page 65 information concerning fair value company’s longterm debt note 19 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense notes consolidated financial statements millions dollars except pershare amounts following table indicates changes company’s suspended exploratory well costs three years ended december 31 2019 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 2827 exploratory well costs capitalized one year december 31 2019 1867 related 12 projects drilling activities underway firmly planned near future 960 balance related 10 projects areas requiring major capital expenditure production could begin additional drilling efforts underway firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 960 referenced following activities associated assessing reserves projects’ economic viability 256 four projects undergoing frontend engineering design final investment decision expected within four years b 704 six projects development alternatives review progress made 22 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects half decisions expected occur next five years 2827 suspended well costs capitalized period greater one year december 31 2019 represents 123 exploratory wells 22 projects tables contain aging costs well project basis note 20 stock options sharebased compensation expense stock options 2019 2018 2017 81 64 tax 105 83 tax 137 89 tax respectively addition compensation expense stock appreciation rights restricted stock performance shares restricted stock units 313 266 tax 60 47 tax 231 150 tax 2019 2018 2017 respectively significant stockbased compensation cost capitalized december 31 2019 december 31 2018 cash received payment option exercises sharebased payment arrangements 2019 2018 2017 1090 1159 1100 respectively actual tax benefits realized tax deductions option exercises 43 48 2019 2018 2017 respectively notes consolidated financial statements millions dollars except pershare amounts cash paid settle performance shares restricted stock units stock appreciation rights 119 157 187 2019 2018 2017 respectively awards chevron longterm incentive plan ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance shares nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards issued january 1 2017 contractual terms vary three years performance shares restricted stock units 10 years stock options stock appreciation rights awards issued january 1 2017 contractual terms vary three years performance shares special restricted stock units five years standard restricted stock units 10 years stock options stock appreciation rights forfeitures performance shares restricted stock units stock appreciation rights recognized occur forfeitures stock options estimated using historical forfeiture data dating back 1990 fair market values stock options stock appreciation rights granted 2019 2018 2017 measured date grant using blackscholes optionpricing model following weightedaverage assumptions 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2019 presented total intrinsic value ie difference exercise price market price options exercised 2019 2018 2017 516 506 407 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2019 55 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plan cost expected recognized weightedaverage period 18 years january 1 2019 number ltip performance shares outstanding equivalent 3669730 shares 2019 1813188 performance shares granted 684620 shares vested cash proceeds distributed recipients 411514 shares forfeited december 31 2019 performance shares outstanding 4386784 fair value liability recorded instruments 370 measured using monte carlo simulation method january 1 2019 number restricted stock units outstanding equivalent 1737479 shares 2019 1054556 restricted stock units granted 244744 units vested cash proceeds distributed recipients 120332 units forfeited december 31 2019 restricted stock units outstanding 2426959 fair value liability recorded vested portion instruments 192 valued stock price december 31 2019 addition outstanding stock appreciation rights granted ltip totaled approximately 40 million equivalent shares december 31 2019 fair value liability recorded vested portion instruments 82 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement benefit opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs company’s main us medical plan increase premedicare company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension opeb plans 2019 2018 follows amounts recognized consolidated balance sheet company’s pension opeb plans december 31 2019 2018 include notes consolidated financial statements millions dollars except pershare amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 6357 4448 end 2019 2018 respectively amounts consisted accumulated benefit obligations us international pension plans 12781 5203 respectively december 31 2019 10514 4360 respectively december 31 2018 information us international pension plans accumulated benefit obligation excess plan assets december 31 2019 2018 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2019 2018 2017 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2019 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 14 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2020 company estimates actuarial losses 385 46 3 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 320 recognized “accumulated comprehensive loss” 2020 related lumpsum settlement costs main us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2019 approximately 3 6 years us international pension plans respectively 8 years opeb plans 2020 company estimates prior service credits costs 2 10 notes consolidated financial statements millions dollars except pershare amounts 28 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2019 company used expected longterm rate return 675 percent us pension plan assets account 68 percent company’s pension plan assets 2018 2017 company used longterm rate return 675 percent plans marketrelated value assets main us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension opeb plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific company’s plans yields highquality bonds projected cash flows discounted valuation date using yield curve main us pension opeb plans effective discount rates derived analysis end 2019 31 percent main us pension plan 31 percent main us opeb plan discount rates plans end 2018 42 43 percent respectively 2017 35 36 percent plans respectively benefit assumptions assumed health care costtrend rates significant effect amounts reported retiree health care costs measurement accumulated postretirement benefit obligation december 31 2019 main us opeb plan assumed health care costtrend rates start 68 percent 2020 gradually decline 45 percent 2025 beyond measurement december 31 2018 assumed health care costtrend rates started 72 percent 2019 gradually declined 45 percent 2025 beyond 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans plan assets investment strategy fair value measurements company’s pension plans 2019 2018 following page notes consolidated financial statements millions dollars except pershare amounts us equities include investments company’s common stock amount 6 december 31 2019 9 december 31 2018 collective trustsmutual funds us plans entirely index funds international plans mostly unit trust index funds mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based thirdparty appraisals occur least year property portfolio alternative investments focus marketneutral strategies low expected correlation traditional asset classes “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts level 3 investments privateequity limited partnerships nav effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined notes consolidated financial statements millions dollars except pershare amounts primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 92 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan company’s investment committee established following approved asset allocation ranges equities 3060 percent fixed income 2040 percent real estate 015 percent alternative investments 015 percent cash 025 percent uk pension plan uk board trustees established following asset allocation guidelines equities 1030 percent fixed income 5585 percent real estate 515 percent cash 05 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety factors including market conditions illiquidity constraints mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2019 company contributed 1096 266 us international pension plans respectively 2020 company expects contributions approximately 1250 us plans 250 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments tax law changes economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying opeb benefits approximately 174 2020 168 paid 2019 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 284 270 316 2019 2018 2017 respectively benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2019 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2019 2018 trust assets 35 34 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 826 1048 936 2019 2018 2017 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 20 beginning page 80 notes consolidated financial statements millions dollars except pershare amounts note 22 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page 74 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provisions made years examination subject future examination guarantees company two guarantees equity affiliates totaling 704 amount 412 associated financing arrangement equity affiliate approximate 2year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 292 associated certain payments terminal use agreement entered equity affiliate approximate 8year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements may relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2020 900 2021 1100 2022 1100 2023 1200 2024 1200 2025 7200 portion commitments may ultimately shared project partners total payments agreements approximately 800 2019 1400 2018 1300 2017 part implementation asu 201602 company assessed contracts previously incorporated unconditional purchase obligations disclosure operating leases 2019 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various operating closed divested sites including limited federal superfund sites analogous sites state laws refineries chemical plants marketing facilities crude oil fields mining sites although company provided known environmental obligations probable reasonably estimable likely company continue incur additional liabilities amount additional future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity notes consolidated financial statements millions dollars except pershare amounts chevron’s environmental reserve december 31 2019 1234 included balance 266 related remediation activities approximately 145 sites company identified potentially responsible party provisions federal superfund law analogous state laws provide joint several liability responsible parties future actions regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2019 environmental reserves balance 968 667 related company’s us downstream operations 28 international downstream operations 272 upstream operations 1 businesses liabilities sites primarily associated company’s plans activities remediate soil groundwater contamination company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2019 recorded liability material company’s results operations consolidated financial position liquidity refer note 23 page 89 discussion company’s asset retirement obligations contingencies governmental entities california jurisdictions filed legal proceedings fossil fuel producing companies including chevron purporting seek legal equitable relief address alleged impacts climate change proceedings likely filed parties unprecedented legal theories set forth proceedings entail possibility damages liability injunctions production fossil fuels believe remote could material adverse effect company’s results operations financial condition management believes proceedings legally factually meritless detract constructive efforts address important policy issues presented climate change vigorously defend proceedings chevron interests venezuelan crude oil production assets operated independent equity affiliates 2019 net oil equivalent production venezuela averaged 35000 barrels per day 3000 barrels per day upgraded synthetic crude synthetic crude production 2019 impacted operating conditions including shutdown petropiar heavy oil upgrader part year operating environment venezuela deteriorating time january 2019 united states government issued sanctions venezuelan national oil company petroleos de venezuela sa pdvsa company’s partner equity affiliates company conducting business pursuant general licenses guidance issued coincident sanctions late july 2019 united states government renewed general license 8a issuance general license 8b subsequently superseded general license 8c issued august 5 2019 authorization provided chevron general license 8c extended general license 8d october 21 2019 general license 8e issued united states government january 17 2020 general license 8e enables company continue meet contractual obligations venezuela pdvsa effective april 22 2020 december 31 2019 carrying value company’s investments approximately 2650 year ended december 31 2019 company recognized losses 54 share net income equity affiliates demurrage foreign exchange losses costs incurred support company’s operations venezuela future events could result environment venezuela becoming challenged could lead increased business disruption volatility associated financial results company continues evaluate carrying value venezuelan investments line accounting policies future events related company’s activities venezuela may result significant impacts company’s results operation subsequent periods please see note 13 “investments advances” page 71 information company’s investments equity affiliates venezuela chevron receives claims submits claims customers trading partners joint venture partners us federal state local regulatory bodies governments contractors insurers suppliers individuals amounts claims individually aggregate may significant take lengthy periods resolve may result gains losses future periods company affiliates also continue review analyze operations may close retire sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result significant gains losses future periods notes consolidated financial statements millions dollars except pershare amounts note 23 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2019 2018 2017 table amount associated “revisions estimated cash flows” 2019 reflects decreased cost estimates decommission wells equipment facilities longterm portion 12832 balance end 2019 11592 note 24 revenue contracts customers presented “sales operating revenue” along activity accounted outside scope accounting standard codification asc 606 material line consolidated statement income purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income refer note 12 beginning page 68 additional information company’s segmentation revenue receivables related revenue contracts customers included “accounts notes receivable net” consolidated balance sheet net allowance doubtful accounts net balance receivables 9247 10046 december 31 2019 december 31 2018 respectively items included “accounts notes receivable net” represent amounts due partners share joint venture operating project costs amounts due others primarily related derivatives leases buysell arrangements product exchanges accounted outside scope asc 606 contract assets related costs reflected “prepaid expenses current assets” contract liabilities reflected “accrued liabilities” “deferred credits noncurrent obligations” consolidated balance sheet amounts items material company’s financial position note 25 financial information earnings 2019 included aftertax gains approximately 1500 relating sale certain properties amount approximately 50 1450 related downstream upstream respectively earnings 2018 included aftertax gains approximately 630 relating sale certain properties approximately 365 265 related downstream upstream assets respectively earnings 2019 included aftertax charges approximately 10400 impairments asset writeoffs related upstream earnings 2018 included aftertax charges approximately 2000 impairments asset writeoffs related upstream notes consolidated financial statements millions dollars except pershare amounts includes 28 416 45 2019 2018 2017 respectively company’s share equity affiliates’ foreign currency effects company 4463 goodwill consolidated balance sheet upstream segment primarily related 2005 acquisition unocal company tested goodwill impairment 2019 impairment required note 26 summarized financial data chevron phillips chemical company llc chevron 50 percent equity ownership interest chevron phillips chemical company llc cpchem refer note 13 page 72 discussion cpchem operations summarized financial information 100 percent cpchem presented table fiveyear financial summary unaudited supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves table costs incurred exploration property acquisitions development1 supplemental information oil gas producing activities unaudited changes estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 13 beginning page 71 discussion company’s major equity affiliates 2017 2018 conformed 2019 presentation supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2019 2018 2017 shown following table net income loss exploration production activities reported page 69 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page 69 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2017 2018 conformed 2019 presentation represents accretion aro liability refer note 23 “asset retirement obligations” page 89 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2017 2018 conformed 2019 presentation represents accretion aro liability refer note 23 “asset retirement obligations” page 89 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved number organizations including society petroleum engineers world petroleum congress american association petroleum geologists company classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved reserves probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods proved undeveloped reserves quantities expected recovered new wells undrilled acreage existing wells relatively major expenditure required recompletion due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager global reserves organization separate upstream operating organization manager supplemental information oil gas producing activities unaudited global reserves 30 years’ experience working oil gas industry holds undergraduate graduate degrees geoscience experience includes various technical management roles providing reserve resource estimates support major capital exploration projects 10 years overseeing oil gas reserves processes named distinguished lecturer american association petroleum geologists active member american association petroleum geologists sepm society sedimentary geologists society petroleum engineers rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain chevron corporation reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s senior leadership team including chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance chevron corporation reserves manual technologies used establishing proved reserves additions 2019 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves end 2019 proved undeveloped reserves totaled 40 billion barrels oilequivalent boe decrease 641 million boe yearend 2018 decrease due 685 million boe revisions transfer 593 million boe proved developed 31 million boe sales partially offset 635 million boe extensions discoveries 26 million boe acquisitions 7 million boe improved recovery major portion reserves revisions attributed company’s decision reduce planned developments evaluate strategic alternatives including divestment scenarios it’s acreage appalachian region 2019 investments totaling approximately 105 billion oil gas producing activities 01 billion nonoil gas producing activities expended advance development proved undeveloped reserves asia expenditures year totaled approximately 53 billion primarily related development projects tco affiliate kazakhstan united states accounted 33 billion related primarily various development activities gulf mexico midland delaware basins africa 05 billion expended various offshore development natural gas projects nigeria angola republic congo development activities canada brazil argentina primarily responsible 10 billion expenditures americas reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2019 company held approximately 21 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 700 million boe remained undeveloped five years related gorgon wheatstone projects field development convert remaining proved supplemental information oil gas producing activities unaudited undeveloped reserves scheduled occur line operating constraints infrastructure optimization africa approximately 300 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos gas projects nigeria affiliates account 12 billion boe proved undeveloped reserves 900 million boe remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion facility constraints annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2019 decreases commodity prices negatively impacted economic limits oil gas properties resulting proved reserve decreases positively impacted proved reserves due entitlement effects yearend reserves quantities updated circumstances significant changes discussed appropriate reserves sections past three years ratio proved undeveloped reserves total proved reserves ranged 35 percent 38 percent proved reserve quantities three years ending december 31 2019 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2019 proved reserves company 114 billion boe company’s estimated net proved reserves liquids including crude oil condensate synthetic oil years 2017 2018 2019 shown table page 99 company’s estimated net proved reserves natural gas liquids shown page 100 company’s estimated net proved reserves natural gas shown page 101 noteworthy changes crude oil condensate synthetic oil proved reserves 2017 2019 discussed shown table following page revisions 2017 improved field performance various gulf mexico fields including jackst malo tahiti midland delaware basins primarily responsible 209 million barrel increase united states improved field performance various fields including agbami sonam nigeria responsible 73 million barrel increase africa synthetic oil reserves canada decreased 42 million barrels primarily due entitlement effects tco affiliate kazakhstan entitlement effects mainly responsible 52 million barrel decrease 2018 improved field performance various gulf mexico fields midland delaware basins primarily responsible 121 million barrel increase united states improved field performance various fields including agbami nigeria mohobilondo republic congo responsible 61 million barrel increase africa reserves americas increased 59 million barrels primarily due improved field performance hebron field canada asia improved performance across numerous assets resulted 37 million barrel increase 2019 portfolio optimizations future drilling various fields midland delaware basins targeted away reservoirs higher gastooil ratios lower execution efficiencies planned divestments appalachian basin primarily responsible 153 million barrel decrease united states operational issues petropiar upgrader venezuela resulted decrease reserves synthetic oil 126 million barrels increase crude oil condensate reserves 105 million barrels reservoir management entitlement effects mainly responsible 75 million barrels increase tco affiliate kazakhstan improved field performance various fields including mohobilondo republic congo mafumeria angola sonam nigeria responsible 42 million barrel increase africa extensions discoveries 2017 extensions discoveries midland delaware basins gulf mexico primarily responsible 323 million barrel increase united states extensions discoveries duvernay shale canada primarily responsible 63 million barrel increase americas 2018 extensions discoveries midland delaware basins primarily responsible 359 million barrel increase united states extensions discoveries duvernay shale canada loma campana argentina primarily responsible 31 million barrel increase americas supplemental information oil gas producing activities unaudited 2019 portfolio optimizations future drilling various fields midland delaware basins targeted towards liquidsrich reservoirs higher execution efficiencies extensions discoveries deepwater fields gulf mexico primarily responsible 394 million barrel increase united states extensions discoveries loma campana argentina primarily responsible 39 million barrel increase americas purchases 2017 purchases 33 million barrels asia due contract extension azerichiraggunashli fields azerbaijan 2018 purchases 31 million barrels united states primarily midland delaware basins sales 2017 sales 51 million barrels united states primarily gulf mexico shelf midland delaware basins 2019 sales 69 million barrels europe united kingdom denmark net proved reserves crude oil condensate synthetic oil ending reserve balances north america 230 269 217 south america 90 72 63 2019 2018 2017 respectively reserves associated canada ending reserve balances africa 3 5 south america 156 64 78 2019 2018 2017 respectively included yearend reserve quantities related productionsharing contracts psc refer page e7 definition psc pscrelated reserve quantities 11 percent 14 percent 16 percent consolidated companies 2019 2018 2017 respectively supplemental information oil gas producing activities unaudited noteworthy changes natural gas liquids proved reserves 2017 2019 discussed shown table revisions 2017 improved field performance midland delaware basins various gulf mexico fields primarily responsible 71 million barrel increase united states 2018 improved field performance midland delaware basins primarily responsible 34 million barrel increase united states 2019 portfolio optimizations low price realizations various fields midland delaware basins planned divestments appalachian basin mainly responsible 120 million barrel decrease united states extensions discoveries 2017 extensions discoveries midland delaware basins appalachian region primarily responsible 135 million barrel increase united states 2018 extensions discoveries midland delaware basins primarily responsible 173 million barrel increase united states 2019 extensions discoveries midland delaware basins deepwater fields gulf mexico primarily responsible 140 million barrel increase united states net proved reserves natural gas liquids reserves associated north america reserves associated africa yearend reserve quantities related productionsharing contracts psc refer page e7 definition psc material 2019 2018 2017 respectively supplemental information oil gas producing activities unaudited net proved reserves natural gas ending reserve balances north america south america 462 582 478 274 281 317 2019 2018 2017 respectively ending reserve balances africa south america 802 799 899 64 110 140 2019 2018 2017 respectively total “as sold” volumes 2379 2289 1995 2019 2018 2017 respectively includes reserve quantities related productionsharing contracts psc refer page e7 definition psc pscrelated reserve quantities 10 percent 10 percent 12 percent consolidated companies 2019 2018 2017 respectively noteworthy changes natural gas proved reserves 2017 2019 discussed shown table revisions 2017 reservoir performance new seismic data greater gorgon area primarily responsible 15 tcf increase australia improved performance midland delaware basins primarily responsible 670 bcf increase united states sonam field nigeria primarily responsible 184 bcf increase africa 2018 reservoir performance well test surveillance data wheatstone greater gorgon area responsible 10 tcf increase australia bibiyana field bangladesh pattani field thailand primarily responsible 347 bcf increase asia improved performance midland delaware basins primarily responsible 258 bcf increase united states 2019 strong performances wheatstone greater gorgon areas mainly responsible 17 tcf increase australia tco affiliate kazakhstan reservoir management entitlement effects mainly responsible 223 bcf increase portfolio optimizations low price realizations various fields midland delaware basins planned divestments appalachian basin mainly responsible 26 tcf decrease united states extensions discoveries 2017 extensions discoveries 14 tcf united states primarily appalachian region midland delaware basins extensions discoveries duvernay shale canada primarily responsible 319 bcf increase americas 2018 extensions discoveries 16 tcf united states primarily appalachian region midland delaware basins 2019 extensions discoveries 10 tcf united states primarily midland delaware basins supplemental information oil gas producing activities unaudited sales 2017 sales 177 bcf united states primarily midland delaware basins sale company’s interests trinidad tobago primarily responsible 129 bcf decrease americas 2019 sales 240 bcf europe united kingdom denmark table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations includes costs retire existing wells facilities addition future wells facilities necessary produce proved undeveloped reserves estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” part iv item 15item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs13 consolidated statement income three years ended december 31 1994 fs14 consolidated balance sheet december 31 1994 1993 fs15 consolidated statement cash flows three years ended december 31 1994 fs16 consolidated statement stockholders equity three years ended december 31 1994 fs17 notes consolidated financial statements fs18 fs29 2 financial statement schedules caltex group companies combined financial statements schedules c1 c20 combined financial statements schedules caltex group companies filed part report schedules omitted applicable required information included consolidated financial statements notes thereto 3 exhibits exhibit index pages 37 38 annual report form 10k lists exhibits filed part report b reports form 8k current report form 8k dated january 24 1995 filed company january 24 1995 report announced unaudited preliminary earnings quarter twelve months ended december 31 1994 current report form 8k dated february 27 1995 filed company february 28 1995 report announced sale port arthur texas fuels refinery clark refining marketing inc 98 million increase 1994 preliminary earnings result reversal previously established provision closure refinery current report form 8k dated march 10 1995 filed company march 10 1995 report contained companys 1994 financial statements audited managements discussion analysis financial condition results operations current report form 8k dated march 10 1995 filed company march 10 1995 report contained summarized financial data three years ended december 31 1994 companys chevron transport corporation subsidiary 35 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 29th day march 1995 chevron corporation kenneth derr kenneth derr chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 29th day march 1995 principal executive officers directors kenneth derr samuel h armacost kenneth derr samuel h armacost chairman board j dennis bonney sam ginn j dennis bonney sam ginn vicechairman board james n sullivan carla hills james n sullivan carla hills vicechairman board charles pigott principal financial officer charles pigott martin r klitten condoleezza rice martin r klitten condoleezza rice vicepresident chief financial officer bruce smart jr bruce smart jr principal accounting officer donald g henderson john young donald g henderson john young vicepresident comptroller malcolm j mcauley george h weyerhaeuser malcolm j mcauley george h weyerhaeuser attorneyinfact 36 exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated august 2 1994 filed exhibit 31 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 32 bylaws chevron corporation amended july 27 1994 including provisions giving attorneysinfact authority sign behalf officers corporation filed exhibit 32 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 41 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated november 22 1988 incorporated herein reference 42 amendment 1 dated december 7 1989 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated december 7 1989 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective january 1 1990 filed exhibit 101 chevron corporations annual report form 10k 1990 incorporated herein reference 102 management contingent incentive plan chevron corporation amended may 2 1989 filed exhibit 102 chevron corporations annual report form 10k 1989 incorporated herein reference 103 chevron corporation excess benefit plan amended restated july 1 1990 filed exhibit 103 chevron corporations annual report form 10k 1990 incorporated herein reference 104 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 105 chevron restricted stock plan nonemployee directors amended restated effective january 29 1992 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 16 1992 incorporated herein reference 106 chevron corporation longterm incentive plan filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 19 1990 incorporated herein reference 121 computation ratio earnings fixed charges page ex1 211 subsidiaries chevron corporation page ex2 231 consent price waterhouse llp page ex3 232 consent kpmg peat marwick llp page ex4 37 exhibit index continued exhibit description 241 powers attorney directors certain officers chevron corporation authorizing signing annual report 2413 form 10k behalf 991 definitions selected financial terms page ex5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 225 bush street san francisco california 94104 38 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs1 fs12 quarterly results stock market data fs12 report management fs13 report independent accountants fs13 consolidated statement income fs14 consolidated balance sheet fs15 consolidated statement cash flows fs16 consolidated statement stockholders equity fs17 notes consolidated financial statements fs18 fs29 supplemental information oil gas producing activities fs30 fs35 fiveyear financial summary fs36 39 managements discussion analysis financial condition results operations key financial results millions dollars except pershare amounts 1994 1993 1992 sales operating revenues 35130 36191 38212 income cumulative effect changes accounting principles 1693 1265 2210 cumulative effect changes accounting principles 641 net income 1693 1265 1569 special credits charges included income 22 883 651 per share income cumulative effect changes accounting principles 260 194 326 net income 260 194 231 dividends 185 175 165 return average capital employed 87 68 85 average stockholders equity 118 91 110 cumulative effect changes accounting principles chevrons net income 1994 1693 billion 34 percent 8 percent 1993 1992 respectively however special items years cumulative effect adopting two new accounting standards 1992 affected comparability companys reported results special items related tax effects increased earnings 1994 22 million decreased earnings 1993 883 million increased earnings 1992 651 million also cumulative effect adopting two new accounting standards reduced 1992 earnings 641 million excluding effects special items years 1992 accounting changes 1994 earnings 1671 billion declined 22 percent strong operating earnings 2148 billion 1993 increased 7 percent 1559 billion 1992 operating environment outlook worldwide petroleum industry conditions weak throughout 1994 crude oil prices fiveyear low beginning year although prices recovered somewhat year supplies remained plentiful companys us realizations average 72 cents per barrel less prior year international realizations declined 123 per barrel average crude oil prices declined four consecutive years us natural gas prices increasing past two years began falling 1994 averaged 22 cents per thousand cubic feet less 1993 ample supplies mild weather held prices companys international natural gas prices fell amount sales margins refined products depressed much year example united states product prices averaged 1 per barrel less previous year highly competitive markets particularly east held prices market conditions tended lengthen time lag product prices reflect gradually increasing crude oil costs year hand chemicals industry experienced dramatic turnaround excess capacity weak demand past four years strengthening industrialized economies particularly united states resulted strong demand higher prices chevrons chemicals earnings rebounded substantially industry conditions continued 1995 companys posted price west texas intermediate wti benchmark crude oil 1675 per barrel yearend 1994 1750 february 28 1995 henry hub natural gas spot price industry marker 161 per thousand cubic feet yearend 1994 155 february 28 1995 us refined products prices january 1995 flat december planned major maintenance shutdowns two companys core refineries resulted lower refinery utilization rates lower sales volumes increased product purchases early part 1995 chemicals operations remained strong chevron began selling federally mandated reformulated gasoline january 1 1995 nine areas united states accounting 20 percent january gasoline sales volumes increased cost manufacturing reformulated gasoline yet fully reflected sales prices company embarked aggressive program several years ago increase competitiveness achieve superior returns stockholders businesses restructured marginal noncore assets divested companys cost structure significantly reduced fs1 time company selectively pursued growth opportunities areas strength company continues review analyze operations may incur future charges related restructuring businesses disposition marginal nonstrategic assets particular company currently reviewing oil gas operations western canada options maximize value certain real estate operations located california united states refining marketing developments connection previously announced restructuring us downstream operations chevron sold philadelphia refinery august 1994 port arthur texas refinery february 1995 two refineries combined capacity 350000 barrels per day 25 percent companys total us refining capacity prior sales philadelphia refinery operated merchant refinery 175000 barrels per day output sold independent petroleum marketers products companys marketing system previously supplied port arthur refinery obtained sources restructuring reflected companys strategy focus resources west southwest parts south companys marketing business strongest smaller refinery organization expected efficient improved cash flow return capital employed disposition two refineries also eliminated large capital investments would otherwise required connection port arthur refinery sale company retained certain environmental cleanup obligations company accrued presently anticipated costs 282 million expended approximately next ten years possible additional provisions may necessary future expenditures funded future cash flows operations material effect anticipated companys liquidity international exploration production developments liquids production 50 percent owned tengizchevroil tco joint venture republic kazakhstan averaged 46000 barrels per day 1994 30000 barrels per day 1993 yearend 1994 tco producing 65000 barrels per day completion second processing plant december 1994 production capacity increased 95000 barrels per day scheduled increase 130000 barrels per day end 1995 beyond pace field development dependent availability additional export capability production levels dependent monthly export quotas set russia transportationexchange agreement currently set 65000 barrels per day chevron prolonged negotiations caspian pipeline consortium composed republics russia kazakhstan sultanate oman agree terms export pipeline system would enable project sell output directly world markets although companys operations nigeria angolan exclave cabinda generally unaffected political uncertainty civil unrest continues exist countries company continues closely monitor developments chevron significant oil producing properties countries major development projects underway 1994 companys net share production nigeria averaged 130000 barrels per day angola 100000 barrels per day chevrons partner nigeria governmentowned nigerian national petroleum corporation nnpc fallen behind paying cash calls chevron well oil companies operating nigeria however nnpc continues make payments company believes amounts owed ultimately paid nigerian government effectively devalued currency naira january 1995 changing fixed exchange rate floating free market rate devaluation significant effect financial position companys nigerian subsidiary expected significant effect ongoing operations environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern manner company conducts operations also products sells costs complying myriad laws regulations pertaining operations products embedded normal costs conducting business fs2 using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1994 15 billion consolidated companies included expenditures 683 million environmental capital expenditures 638 million costs associated control abatement hazardous substances pollutants ongoing operations total amount also includes spending charged reserves established future environmental cleanup programs noncash provisions recorded year addition costs environmental protection associated ongoing operations products company well companies engaged petroleum chemicals industries incurs expenses corrective actions various facilities waste disposal sites obligation take remedial action may incurred result enactment laws federal superfund law issuance new regulations result companys policies area accidental leaks spills requiring cleanup may occur ordinary course business addition obligation may arise operations closed sold expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable standards existing time require investigatory andor remedial work meet current standards 1994 company recorded 505 million beforetax provisions provide environmental remediation efforts including superfund sites actual expenditures charged provisions previously established reserves amounted 182 million 1994 yearend 1994 companys environmental remediation reserve 1219 billion including 61 million related superfund sites provisions superfund law environmental protection agency epa designated chevron potentially responsible party prp otherwise involved remediation 238 hazardous waste sites yearend 1994 companys cumulative share costs settlements approximately 168 sites payments provisions made 1994 prior years 96 million including provision 16 million made 1994 single site expected result material liability company time remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposure superfund law provides joint several liability future actions epa regulatory agencies require chevron assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity generally provisions recorded work identified sites assessment cleanup plan developed costs reasonably estimated 1994 company recorded environmental remediation provisions aggregating 223 million us marketing sites specific contamination yet identified using estimates based history required remediation similar sites likely company continue incur additional charges environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amounts future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemicals concerns although environmental compliance costs substantial company reason believe vary significantly similar costs incurred companies engaged similar businesses similar areas company believes costs ultimately reflected petroleum chemicals industries prices products services petroleum industry incurring major capital expenditures meet cleanair regulations 1990 amendments clean air act united states companies operating california chevron significant presence california air resources board imposed even stricter requirements companys worldwide capital expenditures related air quality believed peaked 495 million 1994 1995 total worldwide environ fs3 mental capital expenditures estimated 622 million 438 million expected spent air quality related measures addition ongoing costs complying environmental regulations costs remediate previously contaminated sites addition reserves environmental remediation discussed company maintains reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives costs environmentally related provisions recognized unitofproduction basis properties produced amount reserves yearend 1994 1520 billion included accumulated depreciation depletion amortization companys consolidated balance sheet companys ongoing operating assets refineries provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made contingencies yearend 1994 company 257 million suspended exploratory wells included properties plant equipment wells suspended pending drilling additional wells determine commercially producible quantities oil gas present well costs capitalized expensed depending results future drilling activity company subject various lawsuits claims contingent liabilities discussed notes accompanying consolidated financial statements company believes resolution matters materially affect financial position liquidity company utilizes various derivative instruments manage exposure price risk stemming integrated petroleum activities instruments may settled delivery underlying commodity whereas others settled cash instruments commonly used global trade petroleum products relatively straightforward involve little complexity substantially shortterm duration activity instruments intended hedge physical transaction hence gains losses arising instruments offset recognized concurrently gains losses underlying commodities new accounting standards 1994 first quarter company adopted two new accounting standards statement financial accounting standards sfas 112 employers accounting postemployment benefits sfas 115 accounting certain investments debt equity securities adoption standards material effect companys consolidated financial statements effect liquidity 1994 consolidated financial statements also include disclosures required sfas 119 disclosure derivative financial instruments fair value financial instruments dealing instruments settled cash special items net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability years table summarizes gains losses aftertax basis special items included companys reported net income millions dollars 1994 1993 1992 prioryear tax adjustments 344 130 72 asset dispositions 48 122 757 asset writeoffs revaluations 71 133 environmental remediation provisions 304 90 44 restructurings reorganizations 45 554 40 lifo inventory losses 10 46 26 11 114 65 total special items 22 883 651 prioryear tax adjustments generally result settlement audit issues taxing authorities reevaluation company tax liabilities result new developments also adjustments required effect deferred income taxes changes statutory tax rates 1994 prioryear tax adjustments increased earnings 344 million including fs4 net reversal 301 million tax related interest reserves resulting companys global settlement internal revenue service issues relating years 1979 1987 tax adjustments decreased earnings 130 million 1993 included effect one percent increase us corporate income tax rate increased earnings 72 million 1992 asset dispositions 1994 consisted sale companys lead zinc prospect ireland generating aftertax profit 48 million sale completed companys withdrawal noncoal minerals activities ortho lawn garden products business major asset sold 1993 generating 130 million gain addition oil gas properties united states indonesia undeveloped coal properties united states marketing assets central america sold 1993 resulting net loss 8 million 1992 assets sold included oil gas properties united states united kingdom canada sudan fertilizer business united states copper interest chile addition stock us oil gas subsidiary exchanged 31500000 shares chevron stock transaction valued 11 billion combination smaller sales resulted aftertax gains 757 million 1992 asset writeoffs revaluations 1993 comprised certain us refinery assets us canadian production assets miscellaneous corporate assets asset writeoffs 1992 consisted 110 million writedown companys beaufort sea oil properties net 23 million charge related certain us refining marketing chemical fertilizer assets environmental remediation provisions pertain estimated future costs environmental cleanup programs certain companys us service stations marketing terminals refineries chemical locations oil gas properties divested operations chevron liability future cleanup costs sites commonly referred superfund sites company designated prp epa addition environmental remediation cleanup costs included 1994 1993 restructuring charges discussed provisions environmental remediation amounted 304 million 1994 90 million 1993 44 million 1992 restructurings reorganizations charges 1994 net 45 million addition 543 million charge provided 1993 restructure companys us refining marketing business 1994 adjustment included 6 million applicable effect restructuring companys chemicals operations adjustment also included result environmental remediation actions agreed regulatory agencies retained company connection terms sale port arthur refinery 1993 charge composed primarily writedown companys philadelphia port arthur refinery facilities related inventories realizable values estimating refineries realizable values company took account certain environmental cleanup obligations charges also included provisions environmental site assessments employee severance philadelphia refinery sold august 1994 port arthur refinery sold february 1995 yearend 1994 reserve balance 715 million tax comprised 491 million applicable loss port arthur facilities inventories 224 million retained future port arthur environmental cleanup obligations additional port arthur environmental reserves established prior decision sell refinery 1992 chevron recorded net charge 40 million associated restructuring workforce reductions connection companys enhanced early retirement program lifo inventory liquidation losses result reduction inventories certain inventory pools valued lastin firstout lifo accounting method lifo losses decreased net income 1994 1993 1992 10 million 46 million 26 million respectively inventories liquidated higher thencurrent costs amounts include companys equity share caltex lifo inventory effects chevrons consolidated petroleum inventories 99 million barrels yearend 1994 1993 105 million barrels yearend 1992 special items 1994 included charges litigation regulatory settlements 31 million partially offset casualty insurance recovery 20 million 1993 net additions 70 million reserves various litigation regulatory issues onetime cash bonus award employees totaling 60 million partially offset favorable inventory adjustment 16 million 1992 insurance recoveries chemical products licensing agreements 76 million partially offset 11 million net additions reserves various litigation regulatory issues fs5 results operations results 1994 depressed lower average crude oil natural gas prices lower sales margins refined products crude oil prices especially low first quarter us refined products margins weak second quarter addition industry conditions company experienced unscheduled refinery downtime refinery operating problems us operations particularly first half year reduced earnings chemicals operations however strong benefiting improved industry fundamentals restructuring cost reduction programs undertaken recent years 1993 compared 1992 strong worldwide refined product sales margins high us natural gas prices mitigated effects lower crude oil prices another contributing factor companys improved operating performance 1993 large reduction operating administrative costs also lower interest exploration expenses helped earnings chemicals operations depressed levels years reflecting continued industry overcapacity weak worldwide economies sales operating revenues 351 billion 362 billion 1993 382 billion 1992 revenues declined 1993 1992 levels primarily due lower prices crude oil natural gas refined products together lower refined product sales volumes factors also accounted corresponding declines purchased crude oil products decline total revenues partially mitigated higher chemicals revenues gasoline excise tax collections income years included net gains resulting disposition noncore assets caused income fluctuate year operating selling administrative expenses adjusted special items declined 150 million 1994 annual operating costs 1994 1 billion less 1991 base measurement year set company launched cost reduction program early 1992 operating expenses 1994 included unanticipated costs associated unscheduled refinery shutdowns maintenance well refinery operating problems although portion cost reduction result operations disposed years bulk decrease due significant reduction companys ongoing cost structure reported selling general administrative expenses 1994 included reversal 319 million accrued interest reserves federal income taxes payable resulting companys settlement irs nine open tax years 1979 1987 millions dollars 1994 1993 1992 reported operating expenses 6314 6267 6145 reported selling general administrative expenses 963 1530 1761 total operational costs 7277 7797 7906 eliminate special charges tax 161 531 282 adjusted ongoing operational costs 7116 7266 7624 operations charged market rates consumption companys fuel costs eliminated consolidated financial statements cost performance measurement costs included amounted 1027 1017 1251 1994 1993 1992 respectively taxes income 11 billion 1994 12 billion 1993 13 billion 1992 equating effective income tax rates 396 percent 479 percent 362 percent three years respectively lower effective tax rate 1994 attributable effect favorable prioryear tax adjustments resulting global settlement internal revenue service years 1979 1987 included reversal excess interest reserves little associated tax effect increase 1993 tax rate 1992 levels due primarily unfavorable prioryear tax adjustments including increase deferred income taxes resulting one percent increase us corporate income tax rate 1992 rate included effect taxfree exchange resulted large book gain associated tax cost currency transactions decreased net income 64 million 1994 compared increases 46 million 1993 90 million 1992 amounts include companys share affiliates currency transactions loss currency transactions 1994 resulted primarily fluctuations value australian philippine currencies relative us dollar 1993 gains resulted fluctuations currency nigeria 1992 gains resulted fluctuations currencies united kingdom canada australia nigeria fs6 results major operating areas millions dollars 1994 1993 1992 exploration production united states 518 566 1043 international 539 580 594 total exploration production 1057 1146 1637 refining marketing transportation united states 40 170 297 international 239 252 111 total refining marketing transportation 279 82 408 total petroleum 1336 1228 2045 chemicals 206 143 89 coal minerals 111 44 198 corporate 40 150 122 income cumulative effect changes accounting principles 1693 1265 2210 cumulative effect changes accounting principles 641 net income 1693 1265 1569 special items major operating areas millions dollars 1994 1993 1992 exploration production united states 66 136 413 international 20 61 14 total exploration production 46 197 427 refining marketing transportation united states 285 725 53 international 10 1 3 total refining marketing transportation 295 724 56 total petroleum 341 921 371 chemicals 9 112 53 coal minerals 48 159 corporate 324 74 68 total special items included net income 22 883 651 us exploration production earnings 1994 excluding special items 17 percent 1993 levels 7 percent 1992 results millions dollars 1994 1993 1992 earnings excluding special items 584 702 630 prioryear tax adjustments 40 5 asset dispositions 54 419 asset writeoffs revaluations 13 environmental remediation provisions 51 13 2 restructurings reorganizations 2 35 lifo inventory losses gains 4 1 5 11 15 21 total special items 66 136 413 reported earnings 518 566 1043 operationally lower average crude oil natural gas prices lower crude oil production levels 1994 contributed earnings decline 1993 crude prices sharply lower last half 1993 recovered point december 1994 companys average realizations 312 per barrel higher december 1993 overall however companys average crude oil realization 1994 decreased 72 per barrel 1386 natural gas prices fell throughout 1994 averaging 177 per thousand cubic feet year 22 1993 average price natural gas accounts almost half companys us oil gas production volumes cost cutting efforts higher natural gas prices major factors 1993s earnings improvement 1992 offsetting lower crude oil prices lower production levels net liquids production 1994 averaged 369000 barrels per day 6 percent 394000 1993 15 percent 432000 barrels per day 1992 net natural gas pro fs7 duction 1994 averaged 21 billion cubic feet per day level 1993 23 billion cubic feet per day 1992 production declines resulted producing property sales connection companys decision concentrate efforts core portfolio 400 producing properties normal field declines international exploration production earnings 1994 excluding special items 19 percent 1993 levels 11 percent 1992 results due primarily foreign currency effects 1994 foreign exchange losses 28 million whereas 1993 1992 foreign exchange gains amounted 57 million 80 million respectively millions dollars 1994 1993 1992 earnings excluding special items 519 641 580 prioryear tax adjustments 20 63 27 asset dispositions 29 166 asset writeoffs revaluations 19 110 restructurings reorganizations 2 9 lifo inventory losses 1 5 total special items 20 61 14 reported earnings 539 580 594 operationally higher production volumes fully offset effect lower average crude oil natural gas prices 1994 companys average international liquids prices including equity affiliates declined 1486 per barrel 1609 1993 1793 1992 average natural gas prices 184 per thousand cubic feet 1994 compared 208 207 1993 1992 respectively 1994 net liquids production including production equity affiliates increased 12 percent 1993 624000 barrels per day 22 percent 1992 production levels net natural gas production volumes also increased 1994 16 percent 1993 546 million cubic feet per day 18 percent 1992 levels production crude oil natural gas increasing steadily since late 1980s reflecting companys strategy growing international operations selected operating data 1994 1993 1992 us exploration production net crude oil natural gas liquids production mbpd 369 394 432 net natural gas production mmcfpd 2085 2056 2313 natural gas liquids sales mbpd 215 211 194 revenues net production crude oil bbl 1386 1458 1650 natural gas mcf 177 199 170 international exploration production 1 net crude oil natural gas liquids production mbpd 624 556 512 net natural gas production mmcfpd 546 469 463 natural gas liquids sales mbpd 34 37 33 revenues liftings liquids bbl 1486 1609 1793 natural gas mcf 184 208 207 us refining marketing gasoline sales mbpd 615 652 646 refined product sales mbpd 699 771 824 refinery input mbpd 1213 1307 1311 average refined product sales price bbl 2437 2535 2596 international refining marketing 1 refined product sales mbpd 934 923 859 refinery input mbpd 623 598 543 chemicals sales operating revenues 2 united states 3079 2694 2929 international 648 602 566 worldwide 3727 3296 3495 1 includes equity affiliates refinery input 1992 include south africa local government restrictions prohibited disclosure refinery input 1992 prior years 2 millions dollars includes sales chevron companies mbpdthousand barrels per day mmcfpdmillion cubic feet per day bblbarrel mcfthousand cubic feet fs8 us refining marketing earnings excluding special items declined 41 percent 1993s strong results 7 percent 1992 levels sales volumes 1994 declined 8 percent 1993 levels largely due sale companys philadelphia refinery august millions dollars 1994 1993 1992 earnings excluding special items 325 555 350 prioryear tax adjustments 38 7 asset dispositions 1 asset writeoffs revaluations 25 31 environmental remediation provisions 249 77 42 restructurings reorganizations 39 543 1 lifo inventory gains losses 3 44 22 3 36 total special items 285 725 53 reported earnings 40 170 297 sales margins lower 1994 compared 1993 refined products prices weak ample supplies created highly competitive market company also experienced unscheduled refinery downtime refinery operating problems early 1994 increased operating expenses required expensive thirdparty product purchases supply companys marketing system compared previous year strong earnings 1993 reflected lower crude oil prices lower operating costs resulting higher average sales margins 1992 total product sales volumes declined 3 percent 1992 levels although sales highervalued motor fuels increased 1 percent international refining marketing earnings include international marine operations equity earnings companys caltex petroleum corporation affiliate excluding special items 1994 earnings level 1993 doubled 1992 millions dollars 1994 1993 1992 earnings excluding special items 249 251 114 prioryear tax adjustments 4 7 asset dispositions 13 asset writeoffs revaluations 1 restructurings reorganizations 1 lifo inventory losses 10 3 9 3 total special items 10 1 3 reported earnings 239 252 111 earnings 1994 reflected lower results companys united kingdom operations several caltex major areas operations particularly refining operations bahrain united kingdom operations impacted weak sales margins effects explosion fire cracking facility manufactures gasoline shipping trading earnings also declined hand canadian results improved higher sales volumes stronger markets results 1992 reflected weak global economic conditions held product prices shrinking sales margins companys areas operations sales volumes 1994 increased slightly 1993 levels 5 percent increase marketing sales mostly offset decline companys trading sales volumes however 1994 volumes nearly 9 percent 1992 due continued demand growth caltex areas operations caltex volumes excluding transactions chevron increased 4 percent 1993 6 percent 1992 1993 continuing growth past several years equity earnings caltex 210 million 227 million 180 million 1994 1993 1992 respectively 1994 1993 favorable swing 69 million resulting inventory adjustments unfavorable impact 43 million caused foreign currency transactions 1994 chevrons share annual caltex earnings benefited 17 million upward adjustments carrying value petroleum inventories reflect market values 1993 writedown 52 million caltex foreign currency transactions losses 27 million 1994 gains 16 million 21 million 1993 1992 respectively total international refining marketing foreign currency transaction losses 19 million 1994 compared gains 2 million 1993 13 million 1992 fs9 chemicals earnings excluding special items dramatically 1993 1992 levels improving us economy reduced industry overcapacity resulting higher sales volumes stronger prices reversing 5 years successively lower operating earnings caused industry overexpansion prior downturn us economy restructurings cost reduction programs undertaken recent years positioned companys chemicals businesses benefit improved industry conditions operating results strong companys divisions additives aromatics especially olefins results would even higher major plant shut month damage caused flooding southeast texas midoctober shutdown resulted lost earnings higher operating repair expenses millions dollars 1994 1993 1992 earnings excluding special items 215 31 36 prioryear tax adjustments 5 2 asset dispositions 130 13 asset writeoffs revaluations 8 environmental remediation provisions 4 restructurings reorganizations 6 5 1 lifo inventory gains 1 9 34 total special items 9 112 53 reported earnings 206 143 89 coal minerals earnings excluding special items increased 43 percent 1993 62 percent 1992 results operationally earnings improved coal sales margins slightly higher sales tonnage 204 million tons slightly prior year 165 million tons 1992 also earnings benefited absence 1993 1992 losses noncoal minerals activities millions dollars 1994 1993 1992 earnings excluding special items 63 44 39 prioryear tax adjustments 2 asset dispositions 48 5 159 3 total special items 48 159 reported earnings 111 44 198 corporate activities include interest expense interest income cash marketable securities real estate insurance operations corporate center costs excluding effects special items corporate charges 1994 284 million compared net charges 76 million 1993 190 million 1992 millions dollars 1994 1993 1992 earnings excluding special items 284 76 190 prioryear tax adjustments 324 22 82 asset writeoffs revaluations 13 restructurings reorganizations 1 7 82 21 total special items 324 74 68 reported earnings 40 150 122 1994 company changed method distributing certain corporate expenses business segments result corporate charges 1994 included 190 million previous method would allocated business segments change net income effect amounts would allocated 1994 companys major operating areas prior method follows us exploration production 34 million us refining marketing 32 million international exploration production 63 million international refining marketing 48 million chemicals 10 million coal minerals 3 million higher interest costs 1994 resulted combined effect higher debt levels higher interest rates 1993 decline 1993 costs relative 1992 reflects 84 million aftertax reduction interest expense due lower interest rates lower debt levels liquidity capital resources cash equivalents marketable securities decreased 710 million 13 billion yearend 1994 cash provided operating activities decreased 13 billion 1994 29 billion compared 42 billion 1993 39 billion 1992 1994 decrease reflects lower operational earnings adjusted noncash charges increased working capital requirements including payment 675 million internal revenue service settlement substantially open tax issues nine fs10 years 1979 1987 cash operations proceeds asset sales increase overall debt levels drawdown cash balances used fund companys capital expenditures dividend payments stockholders yearend 1994 company classified 18 billion shortterm obligations longterm debt settlement obligations consisting commercial paper expected require use working capital 1995 company intent ability evidenced revolving credit arrangements refinance longterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate december 31 1994 chevron 44 billion committed credit facilities various major banks facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 1994 addition chevron one subsidiaries existing shelf registrations file securities exchange commission together would permit registered offerings approximately 700 million debt securities companys debt capital lease obligations totaled 8142 billion december 31 1994 604 million 7538 billion yearend 1993 increase primarily 466 million additional net shortterm borrowings largely issuance commercial paper issuance 350 million 745 percent notes due year 2004 65 million capital lease obligations associated delivery new vessel increases partially offset first quarter repayment 200 million 7875 percent public debt originally due march 1 1997 company also retired 40 million debt related employee stock ownership plan january 1994 companys future debt level primarily dependent capital spending program business outlook company currently expect debt level increase significantly 1995 believes substantial borrowing capacity meet unanticipated cash requirements financial ratios 1994 1993 1992 current ratio 08 09 interest coverage ratio 76 74 82 total debttotal debt plus equity 358 350 364 current ratio current assets current liabilities yearend two items affect current ratio negatively companys opinion affect liquidity included current assets years inventories valued lifo basis yearend 1994 lower current costs 684 million also companys practice continually refinancing commercial paper 32 billion classified shortterm yearend 1994 results large portion shortterm debt outstanding indefinitely chevrons interest coverage ratio increased 1994 due higher income tax interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs companys debt ratio total debt total debt plus equity increased slightly total debt increased equity yeartoyear companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1pl standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities capital exploratory expenditures worldwide capital exploratory expenditures 1994 including companys equity share affiliates expenditures totaled 48 billion expenditures exploration production accounted 57 percent total outlays 1994 53 percent 1993 51 percent 1992 international exploration production spending increased 71 percent worldwide exploration production expenditures 1994 68 percent 1993 65 percent 1992 reflecting companys increased focus international exploration production activities fs11 company projects 1995 capital exploratory expenditures approximately 51 billion including chevrons share spending affiliates excluding affiliates spending essentially flat 39 billion 1995 program provides 27 billion exploration production investments 70 percent international projects company participating several significant oil gas development projects include development hibernia field coast newfoundland tengiz project kazakhstan steam waterflood projects indonesia expansion north west shelf liquefied natural gas project australia continued development britannia natural gas field north sea expanded production projects angola field development expanded exploration congo new field development papua new guinea norphlet trend natural gas development project gulf mexico refining marketing transportation expenditures estimated 19 billion 900 million planned us including upgrading us refineries produce reformulated gasolines needed comply clean air act california air resources board regulations balance focused high growth asia pacific rim countries companys caltex affiliate several major refinery projects way meet rising demand including continuing construction new refinery thailand capacity expansion projects japan korea projected spending also includes funds expansion linear lowdensity polyethylene manufacturing plant cedar bayou texas chemicals facility capital exploratory expenditures quarterly results stock market data unaudited fs12 report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements assuring integrity objectivity statements prepared accordance generally accepted accounting principles fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited price waterhouse llp independent accountants selected audit committee approved stockholders management made available price waterhouse llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management kt derr mr klitten dg henderson kenneth derr martin r klitten donald g henderson chairman board vice president finance vice president chief executive officer chief financial officer comptroller february 28 1995 report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheets related consolidated statements income stockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1994 1993 results operations cash flows three years period ended december 31 1994 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed discussed note 2 consolidated financial statements effective january 1 1992 company changed methods accounting postretirement benefits pensions income taxes price waterhouse llp san francisco california february 28 1995 fs13 consolidated statement income year ended december 31 millions dollars except pershare amounts 1994 1993 1992 revenues sales operating revenues 1 35130 36191 38212 equity net income affiliated companies 440 406 income 284 451 1059 total revenues 35854 37082 39677 costs deductions purchased crude oil products 16990 18007 19872 operating expenses 6314 6267 6145 provision us refining marketing restructuring 69 837 exploration expenses 379 360 507 selling general administrative expenses 963 1530 1761 depreciation depletion amortization 2431 2452 2594 taxes income 1 5559 4886 4899 interest debt expense 346 317 436 total costs deductions 33051 34656 36214 income tax expense cumulative effect changes accounting principles 2803 2426 3463 income tax expense 1110 1161 1253 income cumulative effect changes accounting principles 1693 1265 2210 cumulative effect changes accounting principles 641 net income 1693 1265 1569 per share common stock 2 income cumulative effect changes accounting principles 260 194 326 cumulative effect changes accounting principles 95 net income per share common stock 260 194 231 weighted average number shares outstanding 651672238 650957752 677954828 1 includes consumer excise taxes 4790 4068 3964 2 shares pershare amounts reflect twoforone stock split may 1994 see accompanying notes consolidated financial statements fs14 consolidated balance sheet december 31 millions dollars 1994 1993 assets cash equivalents 413 1644 marketable securities 893 372 accounts notes receivable less allowance 1994 62 1993 66 3923 3808 inventories crude oil petroleum products 1036 1108 chemicals 391 423 materials supplies 263 252 merchandise 20 18 1710 1801 prepaid expenses current assets 652 1057 total current assets 7591 8682 longterm receivables 138 94 investments advances 3991 3623 properties plant equipment cost 46810 44807 less accumulated depreciation depletion amortization 24637 22942 22173 21865 deferred charges assets 514 472 total assets 34407 34736 liabilities stockholders equity shortterm debt 4014 3456 accounts payable 2990 3325 accrued liabilities 1274 2538 federal taxes income 624 782 taxes payable 490 505 total current liabilities 9392 10606 longterm debt capital lease obligations 4128 4082 deferred credits noncurrent obligations 2043 1677 noncurrent deferred income taxes 2674 2916 reserves employee benefit plans 1574 1458 total liabilities 19811 20739 preferred stock authorized 100000000 shares 100 par value none issued common stock authorized 1000000000 shares 150 par value 712487068 shares issued 1069 capital excess par value 1858 1855 deferred compensation employee stock ownership plan esop 900 920 currency translation adjustment 175 108 retained earnings 14457 13955 treasury stock cost 1994 60736435 shares 1993 61008858 shares 2063 2070 total stockholders equity 14596 13997 total liabilities stockholders equity 34407 34736 shares par value amounts reflect twoforone stock split may 1994 see accompanying notes consolidated financial statements fs15 consolidated statement cash flows year ended december 31 millions dollars 1994 1993 1992 operating activities net income 1693 1265 1569 adjustments depreciation depletion amortization 2431 2452 2594 dry hole expense related prior years expenditures 53 29 57 distributions less equity affiliates income 55 173 144 net beforetax gains losses asset retirements sales 83 373 568 net currency translation losses gains 40 27 66 deferred income tax provision 110 160 176 cumulative effect changes accounting principles 641 net increase decrease operating working capital 1 1773 463 82 2 480 1 75 net cash provided operating activities 3 2896 4221 3914 investing activities capital expenditures 3405 3323 3352 proceeds asset sales 731 908 1043 net purchases sales marketable securities 4 545 30 45 net cash used investing activities 3219 2385 2264 financing activities net borrowings shortterm obligations 466 293 1333 proceeds issuance longterm debt 436 199 23 repayments longterm debt financing obligations 588 854 1260 cash dividends paid 1206 1139 1115 purchases treasury shares 5 4 382 net cash used financing activities 897 1505 1401 effect exchange rate changes cash equivalents 11 21 3 net change cash equivalents 1231 352 252 cash equivalents beginning year 1644 1292 1040 cash equivalents yearend 413 1644 1292 1 net increase decrease operating working capital composed following increase decrease accounts notes receivable 44 187 97 increase decrease inventories 57 288 292 decrease increase prepaid expenses current assets 4 52 85 decrease increase accounts payable accrued liabilities 1510 214 567 decrease increase income taxes payable 166 174 175 net increase decrease operating working capital 1773 463 82 2 1994 operating activities comprised primarily increases noncurrent obligations included part noncash provisions environmental remediation 3 net cash provided operating activities includes following cash payments interest income taxes interest paid debt net capitalized interest 310 309 392 income taxes paid 1147 1505 1236 4 net purchases sales marketable securities consists following gross amounts marketable securities purchased 1943 1855 2633 marketable securities sold 1398 1885 2678 net purchases sales marketable securities 545 30 45 see accompanying notes consolidated financial statements fs16 consolidated statement stockholders equity fs17 notes consolidated financial statements millions dollars note 1 summary significant accounting policies chevron corporation consolidated subsidiaries company employ accounting policies accordance generally accepted accounting principles united states subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 50 percent company participates policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method accounting used oil gas exploration production activities derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts hedged transaction occurs gains losses derivatives contracts qualify hedges recognized currently income shortterm investments shortterm investments classified availableforsale highly liquid debt securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities inventories crude oil petroleum products chemicals merchandise stated cost using lastin firstout lifo method aggregate costs market materials supplies generally stated average cost properties plant equipment costs development wells related plant equipment including carbon dioxide certain injected materials used enhanced recovery projects mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed proved oil gas properties regularly assessed possible impairment aggregate worldwide portfolio basis applying informal ceiling test securities exchange commission method possibility impairment may exist aggregate net book carrying value properties net applicable deferred income taxes exceeds aggregate undiscounted future cash flows tax properties calculated accordance accounting rules supplemental information oil gas producing activities addition highcost longleadtime oil gas projects individually assessed prior production startup comparing recorded investment project fair market economic value appropriate economic values generally based managements expectations discounted future aftertax cash flows project time assessment depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized environmental expenditures environmental expenditures relate current ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys domestic marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts fs18 note 1 summary significant accounting policies continued prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs current dollars using currently available technology applying current regulations well companys internal environmental policies future amounts discounted probable recoveries reimbursements recorded asset currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions included income currently cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely note 2 adoption statements financial accounting standards 106 employers accounting postretirement benefits pensions sfas 106 109 accounting income taxes sfas 109 effective january 1 1992 company adopted sfas 106 sfas 109 issued financial accounting standards board effects statements 1992 net income included charge 641 95 per share attributable cumulative effect adoption including companys share equity affiliates net charge composed 833 related tax benefits 423 recognition liabilities retiree benefits primarily health life insurance partially offset credit 192 deferred income tax benefits changes stipulated new income tax accounting rules note 3 special items financial information net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net increase decrease net income related tax effects year ended december 31 1994 1993 1992 asset dispositions net lead zinc property ireland 48 ortho lawn garden products 130 oil gas properties 25 209 stock exchange pennzoil company 376 copper interest chile 159 17 13 48 122 757 asset writeoffs revaluations oil gas properties 31 110 refining marketing assets 24 31 16 8 71 133 prioryear tax adjustments 344 130 72 environmental remediation provisions 304 90 44 restructurings reorganizations workforce reductions net 11 40 us refining marketing 39 543 chemicals 6 45 554 40 lifo inventory losses 10 46 26 net litigation regulatory issues 31 70 11 onetime employee bonus 60 chemicals products license agreements 32 insurance gains adjustments 20 16 44 11 114 65 total special items tax 22 883 651 1994 us refining marketing restructuring charge 39 chemicals charge 6 net adjustments made 1993 charge 543 restructuring reserve primarily composed writedowns two refineries related inventories estimated realizable values estimated realizable value refineries took account certain environmental cleanup obligations also included reserve amounts environmental site assessments employee severance refineries located philadelphia pennsylvania port arthur texas philadelphia refinery sold august 1994 port arthur refinery sold february 1995 reserve reduced amount proceeds received sale philadelphia refinery adjustments made reflect terms sales included adjustments realizable values assets primarily inventories recognition certain environmental remediation obligations retained company adjustments resulted 45 net increase reserve yearend 1994 reserve balance related tax effects composed 491 loss sale port arthur refinery related inventories 224 port arthur environmental cleanup obligations company expect environmental cleanup expenditures made approximate fs19 note 3 special items financial information continued tenyear period material effect liquidity costs funded cash future operations financial information follows year ended december 31 1994 1993 1992 total financing interest debt costs 419 371 478 less capitalized interest 73 54 42 interest debt expense 346 317 436 research development expenses 179 206 229 currency transaction losses gains 64 46 90 includes 24 18 24 1994 1993 1992 respectively companys share affiliates currency transaction effects excess current cost based average acquisition costs year carrying value inventories lifo method used 684 671 803 december 31 1994 1993 1992 respectively note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following noncash transactions 1994 company took delivery new tanker capital lease arrangement asset recorded 65 million addition properties plant equipment capital lease obligations companys employee stock ownership plan esop repaid 40 30 matured debt guaranteed chevron corporation 1994 1993 respectively company reflected payment reductions debt outstanding deferred compensation esop 1993 company acquired 50 percent interest tengizchevroil joint venture tco republic kazakhstan series cash noncash transactions companys interest tco accounted using equity method accounting recorded investments advances consolidated balance sheet cash expended connection formation tco subsequent advances tco included consolidated statement cash flows capital expenditures deferred payment portion tco investment totaled 709 december 31 1993 466 yearend 1994 recorded accrued liabilities deferred credits noncurrent obligations consolidated balance sheet payments 1993 1994 related deferred portion tco investment classified repayments longterm debt financing obligations consolidated statement cash flows company refinanced aggregate amount 334 57 tax exempt longterm debt capital lease obligations 1993 1992 respectively refinancings reflected consolidated statement cash flows 1992 company received 31500000 shares common stock held stockholder exchange stock subsidiary owning certain us oil gas producing properties related facilities cash current assets current liabilities value attributed treasury shares received 1100 property exchanged consisted properties plant equipment carrying value 790 excluding cash net current liabilities 1 cash 57 included reduction proceeds asset sales 1992 company acquired additional ownership interest affiliate accounted equity method noncash transaction increase ownership required consolidation affiliate companys financial statements principal result consolidation increase noncurrent assets liabilities approximately 64 noncash transactions occurred years presented include reissuance treasury shares management compensation plans acquisitions properties plant equipment capital lease transactions changes stockholders equity longterm debt liabilities resulting accounting companys esop amounts transactions material aggregate relation companys financial position major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented year ended december 31 1994 1993 1992 additions properties plant equipment 3112 3214 3342 additions investments 284 179 47 payments assets liabilities net 9 70 37 capital expenditures 3405 3323 3352 expensed exploration expenditures 326 330 450 payments longterm debt financing obligations 242 86 capital exploratory expenditures excluding equity companies 3973 3739 3802 1994 excludes noncash capital lease addition 65 note 5 stockholders equity retained earnings december 31 1994 1993 include 2265 2087 respectively companys share undistributed earnings equity affiliates companys annual meeting may 3 1994 stockholders approved increase authorized shares common stock 500 million 1 billion approved twoforone split companys issued common stock effective may 11 1994 share pershare amounts prior date restated reflect stock split 1988 company declared dividend distribution one right outstanding share common stock rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company right entitles holder purchase stock value equal two times exercise price fs20 note 5 stockholders equity continued right person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase opportunity rights expire november 1998 may redeemed company 5 cents per share prior date rights voting dividend rights become exercisable dilutive effect earnings company twenty million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1994 made rights exercisable note 6 financial instruments balance sheet risk company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures primarily anticipated purchase transactions forecasted occur within 90 days december 31 1994 1993 notional amounts 60 114 respectively company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts made either semiannually annually recorded monthly interest debt expense december 31 1994 notional principal amounts swaps held company totaled 850 contracts remaining terms two five years impact swaps forward exchange contracts companys results operations material company utilizes certain derivative financial instruments hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity instruments consist mainly crude oil futures contracts traded international petroleum exchange natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated crude oil purchases sales generally forecasted occur within ninetyday period natural gas swaps primarily used hedge firmly committed sales terms swap contracts held average maturity twelve months mirroring terms committed sales gains losses instruments offset recognized concurrently gains losses associated underlying commodities concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed various foreign governments wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentration credit risk similar standards diversity creditworthiness applied companys counterparties derivative financial instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit principal security obtained support lines credit negotiated contracts financial strength customer considered sufficient fair value december 31 1994 companys longterm debt 2155 estimated fair value 2127 fair value based quoted market prices december 31 1994 present value expected cash flows quoted market price available december 31 1994 company held crude oil futures contracts natural gas swap contracts approximate negative fair values totaling 38 company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floating rate notes primary instruments held december 31 1994 cash equivalents marketable securities fair value 1178 balance 285 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturity 4 years note 7 summarized financial data chevron usa inc december 31 1994 chevron usa inc chevron corporations principal operating company consisting primarily companys us integrated petroleum operations excluding domestic pipeline operations conducted three divisions chevron usa production company chevron usa products company warren petroleum company summarized financial information chevron usa inc consolidated subsidiaries presented year ended december 31 1994 1993 1992 sales operating revenues 25833 28092 29454 total costs deductions 25367 27588 28410 income cumulative effect changes accounting principles 501 325 811 cumulative effect changes accounting principles 573 net income 501 325 238 december 31 1994 1993 current assets 3341 3661 assets 14136 14099 current liabilities 6347 5936 liabilities 5599 5738 net equity 5531 6086 fs21 note 8 litigation company defendant numerous lawsuits plaintiffs may seek recover large sometimes unspecified amounts matters may remain unresolved several years lawsuit brought company oxy usa inc successor interest cities service company remains pending oklahoma state court suit involves claims breach contract misrepresentation related termination gulf oil corporations offer purchase cities stock 1982 gulf acquired chevron 1984 oxy also asserts company improperly interfered proposed settlement claims brought oxy department energy management opinion resolution lawsuits result significant liability company relation consolidated financial position liquidity note 9 geographic segment data geographic segment distributions companys identifiable assets operating income sales operating revenues summarized following tables december 31 1994 1993 1992 identifiable assets united states petroleum 15540 16443 18508 chemicals 1992 2045 2165 coal minerals 592 744 762 total united states 18124 19232 21435 international petroleum 12493 12202 9671 chemicals 411 412 390 coal minerals 45 13 10 total international 12949 12627 10071 total identifiable assets 31073 31859 31506 corporate 3334 2877 2464 total assets 34407 34736 33970 year ended december 31 1994 1993 1992 operating income united states petroleum 831 692 1693 chemicals 241 162 46 coal minerals 60 59 68 total united states 1132 913 1807 international petroleum 1672 1772 1731 chemicals 81 63 70 coal minerals 79 3 177 total international 1832 1978 total operating income 2964 2745 3785 corporate 161 319 322 income tax expense 1110 1161 1253 income cumulative effect changes accounting principles 1693 1265 2210 cumulative effect changes accounting principles 641 net income 1693 1265 1569 year ended december 31 1994 1993 1992 sales operating revenues united states petroleumrefined products 11690 13169 13964 crude oil 3466 4086 5138 natural gas 1755 1776 1631 natural gas liquids 1072 1098 1075 petroleum revenues 637 682 700 excise taxes 2977 2554 2458 intersegment 977 924 1052 total petroleum 22574 24289 26018 chemicalsproducts 2528 2211 2409 intersegment 273 248 266 total chemicals 2801 2459 2675 coal mineralsproducts 415 447 395 total united states 25790 27195 29088 international petroleumrefined products 2638 2920 2857 crude oil 4783 4415 4893 natural gas 383 380 364 natural gas liquids 108 137 115 petroleum revenues 307 285 227 excise taxes 1797 1499 1490 intersegment 2 1 10 total petroleum 10014 9637 9956 chemicalsproducts 537 497 463 excise taxes 16 15 16 intersegment 8 6 5 total chemicals 561 518 484 coal mineralsproducts 1 2 total international 10576 10155 10442 intersegment sales elimination 1256 1179 1333 corporate 20 15 total sales operating revenues 35130 36191 38212 memo intergeographic sales united states 512 266 309 international 1803 4418 3823 companys primary business integrated petroleum operations secondary operations include chemicals coal companys real estate insurance operations worldwide cash management financing activities corporate beginning january 1 1994 company longer distributes certain corporate expenses business segments prior 1994 expenses allocated basis segments identifiable assets including allocation corporate starting 1994 segments billed direct corporate services unbilled corporate expenses included corporate company believes better reflects current organizational management structure business units corporate departments fs22 note 9 geographic segment data continued result change corporate 1994 included 232 beforetax expenses previous method would reduced segment operating income change net income company also connection change company longer allocates certain corporate identifiable assets business segments december 31 1994 corporate included 1259 identifiable assets previous years would included identifiable assets business segments changes resulted increase 1994 us international petroleum operating income 101 111 respectively identifiable assets december 31 1994 us international petroleum reduced 630 506 respectively effect changes 1994 operating income yearend 1994 identifiable assets companys segments geographic areas material identifiable assets business segments include assets associated operations indicated geographic areas including investments affiliates sales operating revenues petroleum segment derived production sale crude oil natural gas natural gas liquids refining marketing petroleum products company also obtains revenues transportation trading crude oil refined products chemicals revenues result primarily sale petrochemicals plastic resins lube oil fuel additives coal minerals revenues relate primarily coal sales 1994 company completed withdrawal noncoal minerals activities sales operating revenues table include sales unaffiliated customers sales transfer products segments sales transfer products segments geographic areas generally estimated market prices transfers geographic areas presented memo items table equity earnings affiliated companies associated segments affiliates operate sales caltex group included international petroleum segment information caltex tengizchevroil affiliates presented note 11 affiliates either material vertically integrated segments operations note 10 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows december 31 1994 1993 petroleum exploration production 45 50 refining marketing transportation 618 554 663 604 less accumulated amortization 398 409 net capitalized leased assets 265 195 december 31 1994 future minimum lease payments operating capital leases follows december 31 operating capital year leases 1995 158 64 1996 144 60 1997 131 56 1998 114 52 1999 107 44 thereafter 218 659 total 872 935 less amounts representing interest executory costs 456 net present value 479 less capital lease obligations included shortterm debt 306 longterm capital lease obligations 173 future sublease rental income 43 rental expenses incurred operating leases 1994 1993 1992 follows year ended december 31 1994 1993 1992 minimum rentals 410 452 408 contingent rentals 7 9 10 total 417 461 418 less sublease rental income 14 15 14 net rental expense 403 446 404 contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time fs23 note 11 investments advances investments advances companies accounted using equity method investments accounted cost follows december 31 1994 1993 equity method affiliates caltex group 2362 2147 tengizchevroil 1153 927 affiliates 346 426 3861 3500 cost 130 123 total investments advances 3991 3623 chevron owns 50 percent pt caltex pacific indonesia exploration production company operating indonesia caltex petroleum corporation subsidiaries affiliates conducts refining marketing activities asia africa australia new zealand american overseas petroleum limited subsidiaries manages certain companys exploration production operations indonesia companies subsidiaries affiliates collectively called caltex group tengizchevroil tco 50 percent owned joint venture formed 1993 republic kazakhstan develop tengiz korolev oil fields 40year period investment tco december 31 1994 1993 included deferred payment portion 466 709 respectively 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity portion investment recorded upon formation venture company believed time continues believe payment beyond reasonable doubt given original intent continuing commitment parties realizing full potential venture 40year life equity earnings companies accounted equity method together dividends similar distributions received equity method companies years 1994 1993 1992 follows year ended december 31 equity earnings dividends 1994 1993 1992 1994 1993 1992 caltex group 350 361 334 239 172 183 tengizchevroil 10 1 affiliates 100 80 72 146 95 79 total 440 406 385 267 262 cumulative effect changes accounting principles companys transactions affiliated companies primarily purchase indonesian crude oil pt caltex pacific indonesia sale crude oil products caltex petroleum corporations refining marketing companies summarized adjacent table accounts notes receivable consolidated balance sheet include 135 156 december 31 1994 1993 respectively amounts due affiliated companies accounts payable include 46 35 december 31 1994 1993 respectively amounts due affiliated companies year ended december 31 1994 1993 1992 sales caltex group 1166 1739 1784 sales affiliates 7 5 total sales affiliates 1173 1744 1789 purchases caltex group 800 842 797 purchases affiliates 52 101 56 total purchases affiliates 852 943 853 following tables summarize combined financial information caltex group substantially equity method companies together chevrons share amounts shown affiliates 100 percent fs24 note 12 properties plant equipment expenses maintenance repairs 928 875 1045 1994 1993 1992 respectively note 13 taxes year ended december 31 1994 1993 1992 taxes income united states taxes production 102 135 140 import duties 21 18 excise taxes products merchandise 2978 2554 2458 property miscellaneous taxes 374 380 416 payroll taxes 112 122 141 total united states 3587 3212 3173 international taxes production 14 7 30 import duties 11 22 55 excise taxes products merchandise 1812 1514 1506 property miscellaneous taxes 116 112 114 payroll taxes 19 21 total international 1972 1674 1726 total taxes income 5559 4886 4899 us federal income tax expense reduced 60 57 49 1994 1993 1992 respectively lowincome housing business tax credits 1994 beforetax income us operations 1194 compared 687 1993 1592 1992 beforetax income international operations 1609 1739 1871 1994 1993 1992 respectively year ended december 31 1994 1993 1992 taxes income us federal current 175 394 329 deferred 43 241 129 deferred adjustment enacted changes tax lawsrates 54 state local 10 63 54 total united states 228 270 254 international current 815 864 1046 deferred 67 48 47 deferred adjustment enacted changes tax lawsrates 21 total international 882 891 999 total taxes income 1110 1161 1253 deferred income tax provisions included costs benefits 222 98 163 related properties plant equipment 1994 1993 1992 respectively us benefits recorded 1993 related us refining marketing restructuring provision 1992 tax related cumulative effect adopting sfas 106 note 2 423 representing deferred income tax benefits approximating statutory tax rate fs25 note 13 taxes continued companys effective income tax rate varied us statutory federal income tax rate following year ended december 31 1994 1993 1992 statutory us federal income tax rate 350 340 effects income taxes international operations excess taxes us statutory rate 185 156 152 effects asset dispositions 06 80 state local taxes income net us federal income tax benefit 02 22 11 prioryear tax adjustments 44 30 06 effects enacted changes tax lawsrates deferred tax liabilities 13 tax credits 21 24 14 others 32 09 consolidated companies 440 532 394 effect recording equity income certain affiliated companies aftertax basis 44 53 32 effective tax rate 396 479 362 company records deferred taxes tax jurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1994 1993 deferred taxes classified consolidated balance sheet follows december 31 1994 1993 prepaid expenses current assets 112 495 deferred charges assets 148 146 federal taxes income 18 27 noncurrent deferred income taxes 2674 2916 total deferred taxes net 2432 2302 reported deferred tax balances composed following deferred tax liabilities assets december 31 1994 1993 properties plant equipment 4451 4201 inventory 240 293 miscellaneous 254 237 deferred tax liabilities 4945 4731 abandonmentenvironmental reserves 1066 910 employee benefits 564 535 amtother tax credits 711 486 accrued liabilities 299 472 miscellaneous 523 deferred tax assets 3163 2926 deferred tax assets valuation allowance 650 497 total deferred taxes net 2432 2302 certain 1993 amounts reclassified conform 1994 presentation companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 3815 december 31 1994 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 258 would payable upon remittance earnings note 14 shortterm debt december 31 1994 1993 commercial paper 1 5036 4391 current maturities longterm debt 134 167 current maturities longterm capital leases 33 23 redeemable longterm obligations longterm debt 315 297 capital leases 273 255 notes payable 23 203 subtotal 2 5814 5336 reclassified longterm debt 1800 1880 total shortterm debt 4014 3456 1 weighted average interest rates december 31 1994 1993 60 33 respectively 2 weighted average interest rates december 31 1994 1993 58 34 respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date note 15 longterm debt december 31 1994 1993 811 amortizing notes due 2004 1 750 745 notes due 2004 348 9375 sinkingfund debentures due 2016 278 56 notes due 1998 190 975 sinkingfund debentures due 2017 180 179 4625 200 million swiss franc issue due 1997 152 136 690 serial notes due 19941997 12 150 190 7875 notes due 1997 3 200 longterm obligations 702 2 less 50 individually 183 223 foreign currency obligations 545 2 58 78 total including debt due within one year 2289 2224 debt due within one year 134 167 reclassified shortterm debt 60 2 1800 1880 total longterm debt 3955 3937 1 guarantee esop debt 2 weighted average interest rate december 31 1994 3 debt retired maturity date fs26 note 15 longterm debt continued chevron one wholly owned subsidiaries shelf registrations file securities exchange commission sec together would permit issuance 700 debt securities pursuant rule 415 securities act 1933 yearend 1994 company 4425 committed credit facilities banks worldwide 1800 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings agreements based either london interbank offered rate reserve adjusted domestic certificate deposit rate amounts outstanding credit agreements year yearend december 31 1994 1993 company classified 1800 1880 respectively shortterm debt longterm settlement obligations expected require use working capital 1995 company intent ability refinance debt longterm basis consolidated longterm debt maturing five years december 31 1994 follows 1995134 199698 1997246 1998276 199994 note 16 employee benefit plans pension plans company defined benefit pension plans employees principal plans provide automatic membership noncontributory basis retirement benefits provided plans based primarily years service average career earnings highest consecutive three years average earnings companys policy fund least minimum necessary satisfy requirements employee retirement income security act net pension expense credit companys pension plans years 1994 1993 1992 consisted 1994 1993 1992 cost benefits earned year 97 103 106 interest cost projected benefit obligations 263 276 302 actual return plan assets 62 472 309 net amortization deferral 294 101 134 net pension expense credits 4 8 35 settlement gains 1994 related lumpsum payments totaled 17 addition net pension expense 1993 company recognized net settlement loss 63 curtailment loss 4 reflecting termination former gulf pension plan lumpsum payments company pension plans 1992 company recorded charges 65 curtailment loss 7 offset net lumpsum settlement gains 101 related early retirement program offered employees us certain canadian subsidiaries december 31 1994 1993 weighted average discount rates longterm rates compensation increases used estimating benefit obligations expected rates return plan assets follows 1994 1993 assumed discount rates 88 74 assumed rates compensation increases 51 expected return plan assets 101 91 pension plans assets consist primarily common stocks bonds cash equivalents interests real estate investment funds funded status companys combined plans december 31 1994 1993 follows plans assets accumulated excess benefits accumulated excess benefits plan assets december 31 1994 1993 1994 1993 actuarial present value vested benefit obligations 2596 2854 186 183 accumulated benefit obligations 2680 2949 194 projected benefit obligations 3053 3456 222 229 plan assets fair values 3626 3831 1 plan assets greater less projected benefit obligations 573 375 222 228 unrecognized net transition assets liabilities 294 349 18 20 unrecognized net gains losses 178 41 54 74 unrecognized prior service costs 113 84 6 7 minimum liability adjustment 80 52 net pension cost prepaid accrued 214 151 224 179 net transition assets liabilities generally amortized straightline method 15 years profit sharingsavings plan savings plus plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan savings plus plan charges expense profit sharing part profit sharingsavings plan savings plus plan 75 95 84 1994 1993 1992 respectively employee stock ownership plan esop december 1989 company established esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock esop provides partial prefunding companys future commitments profit sharing part plan result annual income tax savings company esop expected satisfy companys obligations profit sharing part plan next 10 years fs27 note 16 employee benefit plans continued allowed aicpa statement position sop 936 company elected continue current practices based sop 763 subsequent consensuses emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations company recorded expense esop 42 60 50 1994 1993 1992 respectively including 71 74 75 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 50 47 35 1994 1993 1992 respectively company made contributions esop 63 57 18 1994 1993 1992 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated profit sharing accounts plan participants based debt service deemed paid year proportion total current year remaining debt service compensation expense 10 17 35 1994 1993 1992 respectively esop shares december 31 follows thousands 1994 1993 allocated shares 5969 5010 unallocated shares 21208 22452 total esop shares 27177 27462 management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip makes outright distributions cash services rendered deferred awards form stock units awards ltip may take form limited stock options restricted stock units nonstock grants stock options become exercisable earlier one year later 10 years date grant maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year december 31 1994 5845260 shares option exercise prices ranging 319375 43875 per share stock option transactions 1994 1993 follows december 31 thousands shares 1994 1993 outstanding january 1 4303 3934 granted 1770 1413 exercised 140 1019 forfeited 88 25 outstanding december 31 5845 4303 exercisable december 31 4152 2912 charges expense combined management incentive plans 31 36 20 1994 1993 1992 respectively benefit plans addition providing pension benefits company makes contributions toward certain health care life insurance plans active qualifying retired employees substantially employees united states certain international locations may become eligible coverage benefit plans companys annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed per capita amount life insurance benefits paid company annual contributions based actual plan experience nonpension postretirement benefits funded company incurred reconciliation funded status benefit plans follows december 31 1994 december 31 1993 health life total health life total accumulated postretirement benefit obligation apbo retirees 480 262 742 593 320 913 fully eligible active participants 120 57 177 139 64 203 active participants 190 37 227 271 56 327 total apbo 790 356 1146 1003 440 1443 fair value plan assets apbo greater plan assets 790 356 1146 1003 440 1443 unrecognized net gain loss 195 66 261 63 25 88 accrued postretirement benefit costs 985 422 1407 940 415 1355 fs28 note 16 employee benefit plans continued companys net postretirement benefits expense follows 1994 1993 1992 health life total health life total health life total cost benefits earned year 23 4 27 23 3 26 23 4 27 interest cost benefit obligation 71 31 102 76 30 106 70 30 100 net postretirement benefits expense 94 35 129 99 33 132 93 34 127 measurement purposes separate health care costtrend rates utilized preage 65 postage 65 retirees 1995 annual rates increase assumed 40 percent 43 percent respectively increasing 85 percent 77 percent 1996 gradually decreasing thereafter average ultimate rates 60 percent 2000 preage 65 50 percent 2000 postage 65 increase assumed health care costtrend rates 1 percent year would increase aggregate service interest cost year 1994 13 would increase december 31 1994 accumulated postretirement benefit obligation apbo 105 december 31 1994 weighted average discount rate 875 percent assumed rate compensation increase related measurement life insurance benefit 50 percent note 17 contingent liabilities commitments us federal income tax california franchise tax liabilities company settled 1976 1987 respectively federal income tax purposes issues allocation state income taxes creditability taxes paid government indonesia resolved 1987 indonesia issue applies years 1982 settlement open tax matters expected material effect consolidated net assets liquidity company opinion management adequate provision made income franchise taxes years either examination subject future examination december 31 1994 company subsidiaries direct indirect guarantors contingent liabilities 249 notes affiliated companies 55 notes others company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers financing arrangements aggregate amount required payments various commitments 1995141 1996137 1997102 199889 199986 2000 after497 total payments agreements 154 1994 142 1993 128 1992 march 1992 agency within department energy doe issued proposed remedial order pro claiming chevron failed comply doe regulations course participation tertiary incentive program although doe regulations involved rescinded march 1981 following decontrol crude oil prices january 1981 statute authorizing regulations expired september 1981 pro purports period april 1980 april 1990 pro claimed company overrecouped regulations 125 period question including interest december 1994 total claim amounted 295 doe seeking increase claim additional 42 plus interest alleged overrecovery company asserts fact incurred loss participation doe program discovery completed evidentiary hearings progress office hearings appeals company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provides known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys related operations results carefully considered management evaluating level current future activity countries areas company significant operations include united states australia united kingdom canada nigeria angola congo papua new guinea china indonesia zaire companys caltex affiliates significant operations indonesia japan korea australia philippines thailand south africa companys tengizchevroil affiliate operates kazakhstan fs29 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities sfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables first three tables provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities nigeria angola zaire congo countries geographic category includes activities australia united kingdom north sea canada papua new guinea countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia tengizchevroil tco exploration production company operating republic kazakhstan began operations april 1993 table costs incurred exploration property acquisitions development 1 fs30 supplemental information oil gas producing activities continued unaudited table ii capitalized costs relating oil gas producing activities fs31 supplemental information oil gas producing activities continued unaudited table iii results operations oil gas producing activities 1 companys results operations oil gas producing activities years 1994 1993 1992 shown net income exploration production activities reported page fs7 reflects income taxes computed effective rate basis accordance sfas 69 income taxes based statutory tax rates reflecting allowable deductions tax credits results reported exclude allocation corporate overhead net income 1993 1992 reported page fs7 includes allocated corporate overhead 1994 interest expense excluded results reported net income amounts page fs7 fs32 supplemental information oil gas producing activities continued unaudited table iii results operations oil gas producing activities 1 continued table iv reserve quantities information companys estimated net proved underground oil gas reserves changes thereto years 1994 1993 1992 shown following table quantities estimated companys reserves engineers reviewed companys reserves advisory committee using reserve definitions prescribed securities exchange commission proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change time additional information becomes available proved reserves include additional quantities recoverable beyond term lease contract unless renewal reasonably certain may result extensions currently proved areas application secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves tengizchevroil tco companys 50 percent owned affiliate kazakhstan include reserves produced dedicated export system place fs33 supplemental information oil gas producing activities continued unaudited table iv reserve quantities information continued table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing future production proved reserves timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs34 supplemental information oil gas producing activities continued unaudited table v standardized measure discounted future net cash flows related proved oil gas reserves continued table vi changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included revisions previous quantity estimates increase 1994 reflected higher crude oil prices natural gas reserve quantity increases partially offset lower natural gas prices decline 1992 1993 due primarily lower crude oil prices fs35 fiveyear financial summary 1 fs36 caltex group companies combined financial statements december 31 1994 c1 caltex group companies combined financial statements december 31 1994 index page general information c3 c4 independent auditors report c5 combined balance sheet c6 c7 combined statement income c8 combined statement retained earnings c9 combined statement cash flows c9 notes combined financial statements c10 c20 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc private joint venture created bahrain 1936 two owners produce transport refine market crude oil refined products group comprised following companies caltex petroleum corporation company incorporated delaware many subsidiaries affiliates conducts refining marketing transporting activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas subsidiaries manages certain exploration production operations indonesia chevron texaco interests necessarily jointly properties brief description companys operations groups environmental activities follows caltex petroleum corporation caltex subsidiaries affiliates caltex operates 61 countries highest economic petroleum growth rates world principally africa asia middle east new zealand australia certain refining marketing operations conducted joint ventures equity interests 14 refineries 11 countries caltex share refinery inputs approximated 920000 barrels per day 1994 caltex continues improve refineries investments designed provide higher yields meet environmental regulations construction new 130000 barrels per day refinery thailand progressing completion anticipated 1996 year end 1994 caltex 8000 employees 3 located united states strong presence principal operating areas caltex average market share 174 refined product sales approximately 13 million barrels per day 1994 caltex built 119 new branded retail outlets 1994 refurbished 177 existing locations aim upgrade retail distribution network caltex conducts international crude oil refined product logistics trading operations subsidiary singapore offices located london dallas capetown bahrain tokyo company interest fleet vessels owns equity interests numerous pipelines terminals depots currently caltex active petrochemical business particularly japan south korea p caltex pacific indonesia cpi holds production sharing contract central sumatra indonesian government granted extension year 2021 1992 cpi also acts operator four petroleum contract areas sumatra jointly held chevron texaco exploration pursued area comprising 2446 million acres production established giant minas duri fields along 80 smaller fields gross production fields operated cpi 1994 718000 barrels per day cpi entitlements sold shareholders use systems sell third parties year end 1994 cpi 6400 employees located indonesia c3 caltex group companies general information american overseas petroleum limited aopl addition coordinating cpi activities aopl subsidiary amoseas indonesia inc manages texacos chevrons undivided interest holdings include ten contract areas indonesia excluding sumatra oil production currently established two contract areas exploration pursued seven others year end 1994 two seven exploration areas relinquished remaining area darajat west java contains geothermal reserves sufficient supply 55 megawatt power generating plant 30 years production geothermal reserves began 1994 amounted 62185795 kwh aopls 1994 share crude oil production amounted 18600 barrels per day year end aopl 254 employees 13 located united states environmental activities groups activities subject environmental health safety regulations countries operates regulations vary significantly degree scope standards enforcement groups policy comply applicable environmental health safety laws regulations group active program ensure environmental standards maintained includes closely monitoring applicable statutory regulatory requirements well enforcement policies countries operates conducting periodic environmental compliance audits december 31 1994 group accrued 12 million various remediation activities environmental guidelines definitions promulgated american petroleum institute provide basis reporting groups expenditures year ended december 31 1994 group including equity share nonsubsidiary companies incurred capital costs 233 million nonremediation related operating expenses 132 million major component groups expenditures prevention air pollution addition december 31 1994 reserves relative future cost restoring abandoning existing oil gas properties 27 million based upon existing statutory regulatory requirements investment operating plans known exposures group believes environmental expenditures materially affect liquidity financial position results operations c4 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1994 1993 related combined statements income retained earnings cash flows years threeyear period ended december 31 1994 combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1994 1993 results operations cash flows years threeyear period ended december 31 1994 conformity generally accepted accounting principles discussed note 2 combined financial statements effective january 1 1992 group adopted provisions financial accounting standards boards statements financial accounting standards sfas 106 employers accounting postretirement benefits pensions 109 accounting income taxes discussed note 2 effective january 1 1994 group adopted provisions financial accounting standards boards sfas 115 accounting certain investments debt equity securities kpmg peat marwick llp dallas texas february 14 1995 c5 caltex group companies combined balance sheet december 31 1994 1993 millions dollars assets 1994 1993 current assets cash equivalents including time deposits 136 1994 64 1993 251 166 notes accounts receivable less allowance doubtful accounts 14 1994 1993 trade 1107 950 187 155 nonsubsidiary companies 88 112 1382 1217 inventories crude oil 132 148 refined products 573 532 materials supplies 73 56 778 736 deferred income taxes 10 4 total current assets 2421 2123 investments advances nonsubsidiary companies equity 2370 1796 miscellaneous investments longterm receivables less allowance 8 1994 7 1993 198 195 2568 1991 property plant equipment cost producing 3284 3027 refining 1787 1483 marketing 2552 2252 marine 35 capitalized leases 119 7777 6916 less accumulated depreciation depletion amortization 3165 2878 4612 4038 prepaid deferred charges 209 237 total assets 9810 8389 see accompanying notes combined financial statements c6 caltex group companies combined balance sheet december 31 1994 1993 millions dollars liabilities stockholders equity 1994 1993 current liabilities notes payable banks financial institutions 1229 966 longterm debt due within one year 157 51 accounts payable trade 1240 967 stockholder companies 77 87 nonsubsidiary companies 123 149 1440 1203 accrued liabilities 113 86 estimated income taxes 133 105 total current liabilities 3072 2411 longterm debt capital lease obligations 715 530 accrued liability employee benefits 113 98 deferred credits noncurrent liabilities 789 646 deferred income taxes 236 263 minority interest subsidiary companies 152 146 stockholders equity common stock 355 additional paidin capital 2 retained earnings 3898 3688 currency translation adjustment 399 250 unrealized holding gain investments 79 total stockholders equity 4733 4295 commitments contingent liabilities total liabilities stockholders equity 9810 8389 see accompanying notes combined financial statements c7 caltex group companies combined statement income years ended december 31 1994 1993 1992 millions dollars 1994 1993 1992 sales operating revenues 1 14751 15409 17281 operating charges cost sales operating expenses 2 12801 13431 15348 selling general administrative expenses 568 496 479 depreciation depletion amortization 331 295 263 maintenance repairs 160 170 165 13860 14392 16255 operating income 891 1017 1026 income deductions equity net income nonsubsidiary companies 263 140 163 dividends interest income 134 99 83 foreign exchange net 73 23 21 interest expense 101 93 102 minority interest subsidiary companies 3 8 13 220 161 152 income provision income taxes cumulative effects changes accounting principles 1111 1178 provision income taxes current 467 433 456 deferred 45 25 53 total provision income taxes 422 458 509 income cumulative effects changes accounting principles 689 720 669 cumulative effects changes accounting principles 51 net income 689 720 1 includes sales stockholder companies 1192 907 835 nonsubsidiary companies 1044 944 924 2 includes purchases stockholder companies 1800 3333 3917 nonsubsidiary companies 1612 1385 641 see accompanying notes combined financial statements c8 caltex group companies combined statement retained earnings years ended december 31 1994 1993 1992 millions dollars 1994 1993 1992 balance beginning year 3688 3310 2955 net income 689 720 cash dividends 479 342 365 balance end year 3898 3688 3310 combined statement cash flows years ended december 31 1994 1993 1992 millions dollars 1994 1993 1992 operating activities net income 689 720 adjustments reconcile net income net cash provided operating activities cumulative effects changes accounting principles 51 depreciation depletion amortization 331 295 263 dividends nonsubsidiary companies less equity net income 220 103 133 net gains asset sales 17 4 deferred income taxes 45 25 53 prepaid charges deferred credits 115 41 25 changes operating working capital 58 31 58 77 10 46 net cash provided operating activities 988 933 769 investing activities capital expenditures 837 763 711 investments advances nonsubsidiary companies 131 149 17 net purchasessales investment instruments 14 21 11 proceeds asset sales 37 73 144 net cash used investing activities 917 860 595 financing activities proceeds borrowings original terms excess three months 1257 745 831 repayments borrowings original terms excess three months 880 704 857 net increase borrowings 135 140 94 dividends paid including minority interest 482 342 365 net cash provided used financing activities 30 161 297 effect exchange rate changes cash equivalents 16 15 8 net change cash equivalents 85 73 131 cash equivalents beginning year 166 239 370 cash equivalents end year 251 166 239 see accompanying notes combined financial statements c9 caltex group companies notes combined financial statements 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex petroleum corporation subsidiaries american overseas petroleum limited subsidiary pt caltex pacific indonesia elimination intercompany balances transactions subsidiary chevron corporation two subsidiaries texaco inc stockholders 50 outstanding common shares group primarily engaged exploring producing refining marketing crude oil refined products eastern hemisphere group employs accounting policies accordance generally accepted accounting principles united states translation foreign currencies us dollar functional currency principal subsidiary operations nonsubsidiary companies japan korea use local currency functional currency inventories crude oil refined product inventories stated lower cost primarily determined lastin firstout lifo method current market value costs include applicable purchase refining costs duties import taxes freight etc materials supplies valued average cost investments advances investments advances nonsubsidiary companies 20 50 voting stock owned group ability exercise significant influence accounted equity method groups equity earnings losses companies included current results related investments reflect equity book value underlying net assets investments nonsubsidiary companies carried cost related dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing area including intangible development costs computed using unitofproduction method assets depreciated class uniform straightline basis depreciation rates based upon estimated useful life class property maintenance repairs necessary maintain facilities operating condition charged income incurred additions betterments materially extend life properties capitalized upon disposal properties net gain loss included income c10 caltex group companies notes combined financial statements 1 summary significant accounting policies continued environmental matters compliance environmental regulations determined consideration existing laws countries group operates groups internal standards group capitalizes expenditures create future benefits contribute future revenue generation remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available nondiscounted estimated costs using data developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realization determined probable 2 changes accounting principles group adopted sfas 106 employers accounting postretirement benefits pensions effective january 1 1992 using immediate recognition option sfas 106 requires accrual employees service group cost retiree health life insurance benefits prior 1992 postretirement benefits included expense benefits paid adoption sfas 106 resulted cumulative aftertax charge 26 million effective january 1 1992 deferred income taxes recognized according asset liability method specified statement financial accounting standards sfas 109 accounting income taxes applying individual jurisdiction tax rates applicable future years differences financial statement tax basis carrying amounts assets liabilities effect tax rate changes previously recorded deferred taxes recognized current year adoption sfas 109 resulted cumulative benefit 77 million effective january 1 1994 group adopted sfas 112 employers accounting postemployment benefits sfas 112 requires companies accrue cost benefits provided former inactive employees employment prior retirement adoption standard materially impact combined financial statements group adopted sfas 115 accounting certain investments debt equity securities effective january 1 1994 sfas 115 requires investments equity securities readily determinable fair values investments debt securities classified three categories based managements intent investments reported fair value except debt securities intended held maturity reported amortized cost previously investments accounted amortized cost cumulative effect change january 1 1994 increase stockholders equity 70 million related taxes representing unrealized net gains applicable securities categorized availableforsale new standard securities primarily held nonsubsidiary companies accounted equity method c11 caltex group companies notes combined financial statements 3 inventories excess current cost stated value inventory maintained lifo basis approximately 56 million 40 million december 31 1994 1993 respectively 1994 1993 1992 inventory quantities maintained lifo basis reduced certain locations inventory reductions resulted decrease earnings consolidated subsidiaries nonsubsidiary companies equity approximately 12 million 2 million 1994 1992 respectively increase earnings 1 million 1993 charges 104 million reduced income 1993 reflect market value certain inventories lower lifo carrying value earnings 34 million 14 million recorded 1994 1992 respectively reflect partial recovery prior year charges 4 nonsubsidiary companies equity investments advances nonsubsidiary companies equity december 31 include following millions equity share 1994 1993 nippon petroleum refining company ltd 50 997 829 koa oil company ltd 50 448 310 honam oil refinery company ltd 50 557 423 various 368 234 2370 1796 shown summarized combined financial information nonsubsidiary companies millions 100 equity share 1994 1993 1994 1993 current assets 5352 4680 2651 2316 assets 7821 6147 3858 2975 current liabilities 4940 4900 2363 2349 liabilities 3504 2306 1776 1146 net worth 4729 3621 2370 1796 100 equity share 1994 1993 1992 1994 1993 1992 operating revenues 10886 10679 10502 5418 5304 5216 operating income 770 494 645 381 242 319 net income 526 281 326 263 140 163 c12 caltex group companies notes combined financial statements 4 nonsubsidiary companies equity continued retained earnings december 31 1994 includes 14 billion representing groups share undistributed earnings nonsubsidiary companies equity cash dividends received nonsubsidiary companies 43 million 37 million 30 million 1994 1993 1992 respectively sales 50 percent owner nippon petroleum refining company ltd products refined nippon petroleum refining company ltd koa oil company ltd approximately 2 billion 19 billion 2 billion 1994 1993 1992 respectively 5 notes payable shortterm financing consists primarily demand loans promissory notes acceptance credits overdrafts weighted average interest rates shortterm financing december 31 1994 1993 68 47 respectively unutilized lines credit available shortterm financing totaled 678 million december 31 1994 6 longterm debt capital lease obligations longterm debt capital lease obligations related interest rates december 31 1994 consist following millions 1994 1993 us dollars variable interest rate term loans 233 173 fixed interest rate term loans 76 average rate 206 220 australian dollars debentures interest rates 125 due 1996 4 8 promissory notes payable 72 average rate 81 76 fixed interest rate loan 112 rate due 2001 132 commercial paper 70 average rate 23 capital lease obligations 11 33 new zealand dollars term loans interest rates 6635 due 19961997 16 14 9 6 715 530 c13 caltex group companies notes combined financial statements 6 longterm debt capital lease obligations continued december 31 1994 1993 124 million 101 million respectively shortterm borrowings classified longterm debt settlement obligations expected require use working capital 1995 group intent ability refinance debt longterm basis december 31 1994 1993 170 million 101 million respectively longterm committed credit facilities available major banks support notes payable classified longterm debt contractual maturities subsequent december 31 1994 follow millions 1995 157 included combined balance sheet current liability excluding shortterm borrowings classified longterm debt 1996 101 1997 61 1998 94 1999 137 2000 thereafter 322 7 employee benefits group retirement plans covering substantially eligible employees generally plans provide defined benefits based final average pay defined benefit levels vesting terms funding practices vary among plans funded status retirement plans primarily foreign inclusive nonsubsidiary companies equity december 31 follows millions assets exceed accumulated benefits funding status benefits exceed assets 1994 1993 1994 1993 actuarial present value vested benefit obligation 282 280 137 117 accumulated benefit obligation 317 309 161 137 projected benefit obligation 493 484 225 195 amount assets available benefits funded assets fair value 435 450 58 39 net pension asset liability recorded 8 11 136 128 total assets 427 439 194 167 assets less projected benefit obligation 66 45 31 28 consisting unrecognized transition net assets liabilities 16 31 3 2 unrecognized net losses 55 44 25 23 unrecognized prior service costs 27 32 3 weighted average rate assumptions discount rate 97 95 66 65 rate increase compensation 72 74 46 47 expected return plan assets 102 103 55 c14 caltex group companies notes combined financial statements 7 employee benefits continued expenses funded unfunded combined 1994 1993 1992 cost benefits earned year 27 26 interest cost projected benefit obligation 55 58 54 actual return plan assets 23 59 9 net amortization deferral 16 38 43 42 33 8 operating leases group various operating leases involving service stations equipment facilities net rental expense 121 million 110 million 95 million 1994 1993 1992 respectively future net minimum rental commitments operating leases noncancelable terms excess one year follows millions 1995 55 1996 67 1997 52 1998 47 1999 44 2000 thereafter 106 9 commitments contingencies january 25 1990 caltex petroleum corporation certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer lawsuit filed houston texas state court removal federal district court houston litigations disposition turned questions federal court jurisdiction whether case dismissed forum non conveniens plaintiffs petition purported class action behalf least 3350 parties either survivors next kin persons deceased collision philippine waters december 20 1987 one vessel involved collision carrying group products connection freight contract although group direct indirect ownership operational responsibility either vessel various theories liability alleged group specific monetary recovery sought although petition contained variety demands various categories compensatory well punitive damages issues resolved groups favor federal district court march 1992 forum non conveniens dismissal decision final subsequent dismissal consistent terms cases filed group entities philippine courts previously filed subsequent collision various stages litigation vigorously resisted however notwithstanding houston federal district court dismissal plaintiffs filed another lawsuit alleging causes action texas litigation louisiana state court new orleans group removed case federal district court new orleans remanded back louisiana state court group sought injunctive relief federal district court houston order ensure courts previous dismissal would given proper effect request relief denied group filed expedited appeal u fifth circuit court appeals courts ruling expected shortly management contesting case vigorously possible estimate amount damages involved group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third party insurance c15 caltex group companies notes combined financial statements 9 commitments contingencies continued group also involved certain litigation internal revenue service tax audits could involve significant payments items ultimately resolved adversely group impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position results operations liquidity unconditional purchase obligations 1992 1993 considered material however april 1994 group subsidiary entered contractual commitment effective october 1996 period eleven years purchase refined products conjunction financing refinery presently construction nonsubsidiary company total future estimated commitments billions group similar contracts based current pricing projected growth rates 1995 6 1996 9 1997 11 1998 13 1999 15 2000 expiration contracts 96 purchases billions similar contracts 5 6 4 1994 1993 1992 respectively group process finalizing sales certain property required local government group compensated value property transferred cost replacing operating assets affected transfer compensation fully utilized reconstruction program five year period excess compensation net book value property dismantled operating assets recognized earnings early 1995 impact groups earnings currently estimated net aftertax gain approximately 155 million 10 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk december 31 group commitments outstanding interest rate swaps foreign currency transactions notional contractual amounts follows millions 1994 1993 interest rate swaps pay fixed receive floating 363 294 interest rate swaps pay floating receive fixed 182 50 commitments purchase foreign currencies 252 244 commitments sell foreign currencies 274 183 group enters interest rate swaps managing interest rate risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities eight years fair values swaps material group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments forward exchange contracts hedging existing liabilities maturities seven years contracts hedging firm commitments maturities year gains losses forward exchange contracts recognized income concurrent income recognition underlying hedged transaction fair values forward exchange contracts material c16 caltex group companies notes combined financial statements 10 financial instruments continued groups activity commoditybased derivative contracts must settled cash material groups longterm debt excluding capital lease obligations 704 million 497 million december 31 1994 1993 respectively fair values 696 million 511 million december 31 1994 1993 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents notes accounts receivable current liabilities approximate fair value short maturity december 31 1994 group investments debt securities available forsale debt securities held maturity amortized costs 63 million maturity less ten years 77 million maturity less one year respectively fair value securities approximates amortized costs investment marketable equity securities material december 31 1994 groups carrying amount investments nonsubsidiary companies accounted equity included 83 million netoftax unrealized net gains investments held nonsubsidiaries certain group companies contingently liable guarantors 2 million 7 million december 31 1994 1993 respectively group also commitments 99 million 36 million december 31 1994 1993 respectively form letters credit issued behalf group companies facilitate either groups parties ability trade normal course business addition group contingently liable december 31 1994 maximum 192 million nonsubsidiary precompletion sponsor support project finance obligations group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentrations risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer country considered sufficient credit losses historically within managements expectations 11 taxes charged income consist following millions 1994 1993 1992 taxes income taxes duties import excise taxes 2384 1978 1891 32 29 total taxes income taxes 2416 2007 1920 provision income taxes 422 458 509 2838 2465 2429 c17 caltex group companies notes combined financial statements 11 taxes continued provision income taxes substantially foreign computed individual company basis rates effect various countries operation actual tax expense differs expected tax expense computed applying us federal corporate tax rate income provision income taxes follows 1994 1993 1992 computed expected tax expense 350 340 effect recording equity net income nonsubsidiary companies tax basis 83 42 49 effect dividends received subsidiary nonsubsidiary companies 44 42 38 foreign income subject foreign taxes excess us statutory tax rate 69 74 116 increasedecrease deferred tax asset valuation allowance 3 31 4 3 4 9 380 389 432 deferred income taxes provided temporary differences financial reporting basis tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax assets liabilities december 31 1994 1993 follows millions deferred tax assets tax liabilities 1994 1993 1994 1993 inventory 17 10 12 18 depreciation 310 298 retirement plans 34 33 2 3 tax loss carryforwards 27 29 investment allowances 40 8 30 20 41 34 148 100 365 353 valuation allowance 9 6 total deferred taxes 139 94 365 353 c18 caltex group companies notes combined financial statements 11 taxes continued valuation allowance established record deferred tax assets amounts recoverability likely net income decreased 1994 3 million increased 36 million 5 million 1993 1992 respectively changes deferred tax asset valuation allowance undistributed earnings deferred income tax provision made approximated 38 billion december 31 1994 earnings intended indefinitely reinvested earnings would become taxable us upon remittance dividends practical estimate amount tax might payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability 12 cash flows purposes statement cash flows highly liquid debt instruments original maturities three months less considered cash equivalents changes operating working capital consists following millions 1994 1993 1992 notes accounts receivable 97 82 45 inventories 37 66 114 accounts payable 152 147 212 accrued liabilities 16 27 estimated income taxes 24 14 84 total 58 31 58 net cash provided operating activities includes following cash payments interest income taxes millions 1994 1993 1992 interest paid net capitalized interest 94 92 106 income taxes paid 444 391 528 significant noncash investing financing transactions occurred 1994 1993 1992 13 december 14 1994 caltex australia limited cal subsidiary group entered conditional agreement form petroleum refining marketing joint venture ampol limited competitor effective january 1 1995 agreement subject completion certain conditions included among others confirmation australian trade practices commission tpc merger would contravene local laws february 2 1995 cal received notification tpcs opinion merger would lessen competition therefore would contravene australian regulations cal ampol limited currently evaluating alternative options address tpc ruling yet formed joint venture c19 caltex group companies notes combined financial statements 14 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures equity affiliates accordingly disclosures presented herein c20item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs17 consolidated statement income three years ended december 31 1996 fs17 consolidated balance sheet december 31 1996 1995 fs18 consolidated statement cash flows three years ended december 31 1996 fs19 consolidated statement stockholders equity three years ended december 31 1996 fs20 notes consolidated financial statements fs21 fs33 2 financial statement schedules caltex group companies combined financial statements c1 c21 combined financial statements caltex group companies filed part report schedules omitted applicable required information included combined financial statements notes thereto 3 exhibits exhibit index pages 33 34 annual report form 10k lists exhibits filed part report b reports form 8k current report form 8k dated january 24 1997 filed company january 24 1997 report chevron announced preliminary unaudited earnings year ended december 31 1996 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day march 1997 chevron corporation kenneth derr kenneth derr chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 26th day march 1997 principal executive officers directors kenneth derr samuel h armacost kenneth derr chairman board samuel h armacost james n sullivan sam ginn james n sullivan vicechairman board sam ginn carla hills carla hills j bennett johnston j bennett johnston richard h matzke principal financial officer richard h matzke martin r klitten charles pigott martin r klitten vicepresident charles pigott chief financial officer condoleezza rice principal accounting officer condoleezza rice stephen j crowe frank shrontz stephen j crowe comptroller frank shrontz changlin tien changlin tien george h weyerhaeuser george h weyerhaeuser lydia beebe john young lydia beebe attorneyinfact john young exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated august 2 1994 filed exhibit 31 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 32 bylaws chevron corporation amended july 27 1994 including provisions giving attorneysinfact authority sign behalf officers corporation filed exhibit 32 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 41 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated november 22 1988 incorporated herein reference 42 amendment 1 dated december 7 1989 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated december 7 1989 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective january 1 1990 filed exhibit 101 chevron corporations annual report form 10k 1990 incorporated herein reference 102 management contingent incentive plan chevron corporation amended may 2 1989 filed exhibit 102 chevron corporations annual report form 10k 1989 incorporated herein reference outstanding awards plan made plan longer effect 103 chevron corporation excess benefit plan amended restated july 1 1990 filed exhibit 103 chevron corporations annual report form 10k 1990 incorporated herein reference 104 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 105 chevron restricted stock plan nonemployee directors amended restated effective january 29 1992 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 16 1992 incorporated herein reference 106 chevron corporation longterm incentive plan filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 19 1990 incorporated herein reference 121 computation ratio earnings fixed charges page e1 211 subsidiaries chevron corporation page e2 231 consent price waterhouse llp page e3 exhibit index continued exhibit description 232 consent kpmg peat marwick llp page e4 241 powers attorney directors certain officers chevron corporation authorizing signing annual report 2415 form 10k behalf 271 financial data schedule 991 definitions selected financial terms page e5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 575 market street san francisco california 94105 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs1 fs15 quarterly results stock market data fs16 report management fs16 consolidated income statement fs17 report independent accountants fs17 consolidated balance sheet fs18 consolidated statement cash flows fs19 consolidated statement stockholders equity fs20 notes consolidated financial statements fs21 fs33 supplemental information oil gas producing activities fs34 fs39 fiveyear financial summary fs40 managements discussion analysis financial condition results operations 1996 highlights net income 2607 billion highest chevrons history chevrons average us crude oil realization 1880 per barrel highest seven years average us natural gas realization 228 per thousand cubic feet highest 13 years worldwide oil gas reserves increased fourth consecutive year international crude oil production increased seventh consecutive year cash provided operating activities 58 billion debt reduced 16 billion annual dividend stockholders increased ninth consecutive year key financial results millions dollars except pershare amounts 1996 1995 1994 sales operating revenues 42782 36310 35130 net income 2607 930 1693 special charges credits included net income 44 1032 22 per share net income 399 143 260 dividends 208 1925 185 return average capital employed percent 127 53 87 average stockholders equity percent 174 64 118 chevrons net income 1996 record 2607 billion significantly net income 930 million 1995 1693 billion 1994 special items years 1995 adoption new accounting standard asset impairment affected comparability companys reported results net income reduced net special charges 44 million 1996 373 million 1995 addition adoption new accounting standard 1995 reduced net income 659 million special items benefited net income 22 million 1994 excluding items operating earnings 1996 2651 billion 35 percent 1962 billion earned 1995 59 percent 1671 billion 1994 operating environment outlook industry conditions 1996 crude oil natural gas production business best several years higher expected demand low industry inventory levels pushed chevrons average crude oil realizations highest level seven years us natural gas prices highest level 13 years worldwide oil gas production 11year high chevron well positioned benefit favorable conditions earnings companys upstream business exploration production record levels however downstream side business refining marketing higher prices dampened operating results highly competitive marketplace prevented increased feedstock fuel costs fully recovered refined product prices particularly gasoline much year additionally increased manufacturing cost cleanerburning gasolines mandated california 1996 contributed depressed sales margins nevertheless chevrons downstream earnings improved 1995 poor refining margins significant refinery downtime reduced earnings particularly united states much 1995 refinery downtime upgrade modify companys two california refineries manufacture californiamandated gasolines required pump 1996 chevron successfully introduced fuels supply disruptions us chemicals industry entered cyclical downturn latter half 1995 persisted throughout 1996 industry overcapacity depressed prices companys major chemical products time rising crude oil natural gas prices increased feedstock fuel costs although sales volumes remained strong earnings chevrons chemical operations declined fs1 early 1997 crude oil natural gas prices declined chevrons posted price west texas intermediate wti benchmark crude oil 2500 yearend 1996 2075 february 21 1997 henry hub natural gas spot price industry marker 372 per thousand cubic feet yearend 1996 retreated 200 level late february 1997 weak sales margins companys refined chemical products continued first quarter 1997 however decline crude oil prices eventually allow refined product prices better reflect raw material costs chemicals industry oversupply expected continue 1997 chevron continues review operations improve competitiveness profitability may 1996 company completed exit real estate development business sale last major portfolio california properties october four mature producing oil fields united kingdom sector north sea one indonesia sold proceeds nearly 500 million sales provided funds attractive growth projects august 1996 merger chevrons natural gas marketing business natural gas liquids company warren petroleum ngc corporation completed chevron received 28 percent equity ownership ngc 295 million cash notes ngc leading gatherer processor transporter marketer energy products north america united kingdom april 1996 chevrons 50 percentowned caltex affiliate sold interest two japanese refineries 2 billion caltex paid dividend part proceeds shareholders used balance investment higher growth asiapacific areas caltexs grassroots 130000barrelsperday refinery thailand started midyear expansion 50 percent owned refinery korea completed late 1996 doubling capacity 600000 barrels per day company announced november merging united kingdom refining marketing subsidiary gulf oil great britain ltd elf murphy oil merger expected completed second quarter 1997 chevron 41 percent new larger company 1500 service stations 8 percent uk fuels market connection anticipated transaction 200 million tax estimated impairment provision recognized 1996 results several major chemicals projects way announced position chevron benefit next upturn chemicals industry include expansion highdensity polyethylene capacity orange texas plant paraxylene expansion pascagoula mississippi refinery expansion ethylene cumene production facilities port arthur texas expansion polystyrene plant marietta ohio internationally company constructing fuel lube oil additives plant singapore announced plans build polystyrene plant china 5050 joint venture building benzene plant cyclohexane unit saudi arabia international exploration production developments significant progress made 1996 unlocking vast oil gas reserves tengiz oil field kazakstan chevron held 50 percent interest tengizchevroil tco affiliate despite lack adequate export facilities tco 1996 successful developing alternate oil markets production averaging 112000 barrels per day nearly double 58000 barrels per day produced 1995 yearend 1996 joint venture producing 160000 barrels per day addition several significant steps taken toward ultimate development export pipeline march 1996 caspian pipeline consortium cpc formed 1992 governments kazakstan russia oman restructured private companies including chevron given opportunity join early december 1996 agreement signed allow cpc chevron 15 percent interest begin construction pipeline tengiz oil field russian black sea coast 900mile 2 billion pipeline expected completed 1999 fs2 january 1997 chevron reached agreement principle sell 10 percent 50 percent interest tco affiliate lukoil russian oil company arco thereby reducing chevrons ownership 45 percent company record gain sale expected occur first quarter 1997 july 1996 company began operating 80000barrelsperday boscan oil field venezuela agreement maraven subsidiary petroleos de venezuela national oil company 20year agreement 10year extension option chevron assumed financial technical operational responsibilities production development field return receive operating expense capital recovery plus interest incentive fee chevron plans spend 250 million behalf maraven next three years expectation increasing production 115000 barrels per day 1999 environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern manner company conducts operations also products sells costs complying myriad laws regulations pertaining operations products embedded normal costs conducting business using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1996 903 million consolidated companies included expenditures 206 million environmental capital expenditures 697 million costs associated control abatement hazardous substances pollutants ongoing operations total amount also includes spending charged reserves established prior years environmental cleanup programs noncash provisions increase reserves establish new ones year addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various currently previously owned facilities waste disposal sites obligation take remedial action may incurred result enactment laws federal superfund law issuance new regulations result companys policies area accidental leaks spills requiring cleanup may occur ordinary course business addition obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable standards existing time require investigatory andor remedial work meet current standards company retained certain environmental cleanup obligations sold port arthur texas refinery 1995 anticipated costs accrued time sale terms sales contract obligations reevaluated 1997 1996 company recorded 99 million beforetax provisions 64 million tax environmental remediation efforts including superfund sites actual expenditures charged provisions previously established reserves amounted 198 million 1996 yearend 1996 companys environmental remediation reserves 1135 billion including 45 million related superfund sites provisions superfund law environmental protection agency epa designated chevron potentially responsible party prp otherwise involved remediation 266 hazardous waste sites company made provisions payments 1996 prior years approximately 182 sites single site expected result material liability company time remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposure superfund law provides joint several liability future actions epa regulatory agencies require chevron assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity fs3 likely company continue incur additional charges beyond reserved environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amounts future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemicals concerns although environmental compliance costs substantial company reason believe vary significantly similar costs incurred companies engaged similar businesses similar areas company believes costs ultimately reflected petroleum chemicals industries prices products services past several years petroleum industry incurred major capital expenditures meet cleanair regulations 1990 amendments clean air act united states companies operating california chevron significant presence california air resources board carb imposed even stricter requirements fiveyear period 1991 1995 chevron spent 18 billion capital projects comply air quality measures majority related complying carb requirements bulk spending completed 1995 resulted decrease capitalized airquality expenditures approximately 500 million years 1994 1995 70 million 1996 1997 total worldwide environmental capital expenditures estimated 222 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites addition reserves environmental remediation discussed previously company maintains reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives costs environmentally related provisions recognized unitofproduction basis properties produced amount reserves yearend 1996 15 billion included accumulated depreciation depletion amortization companys consolidated balance sheet companys ongoing operating assets refineries provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made contingencies company subject various lawsuits claims contingent liabilities including along oil companies actions challenging oil gas royalty severance tax payments based posted prices breach contract lawsuit brought oxy usa company resulted judgment chevron july 1996 742 million including interest continues accrue company filed appeal outcome cannot presently determined certainty company believes errors committed trial court result judgment reversed matters discussed notes accompanying consolidated financial statements company believes resolution matters materially affect financial position liquidity although losses could material respect earnings given period companys operations affected changing economic regulatory political environments various countries operates political uncertainty civil unrest may threaten safety employees companys continued presence country factors carefully considered evaluating level current future activity countries company utilizes various derivative instruments manage exposure price risk stemming integrated petroleum activities instruments commonly used oil gas trading activities relatively straightforward involve little complexity exception certain longterm natural gas swaps shortterm duration activity instruments intended hedge physical transaction hence gains losses arising instruments offset recognized concurrently gains losses underlying commodities company believes material market credit risks operations fs4 financial position liquidity result commodities andother derivatives activities including forward exchange contracts interest rate swaps control systems designed monitor manage financial exposures accordance company policies procedures special items net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability years following table summarizes losses gains aftertax basis special items included companys reported net income year ended december 31 millions dollars 1996 1995 1994 asset writeoffs revaluations new accounting standard 659 337 304 asset dispositions 391 7 48 environmental remediation provisions 54 90 304 prioryear tax adjustments 52 22 344 restructurings reorganizations 14 50 45 lifo inventory losses gains 4 2 10 78 84 11 total special items 44 1032 22 asset writeoffs revaluations 1996 related primarily 200 million estimated impairment provision connection companys decision merge united kingdom refining marketing operations two oil companies 1997 also 1996 included 68 million impairment writedowns oil gas properties related pipeline facilities 29 million adjustment 1995 provision loss anticipated exiting real estate development business including additional amounts environmental remediation 40 million asset writeoffs 1995 estimated loss 168 million recognized connection companys decision exit real estate development business concurrent implementing new accounting standard asset impairment 1995 preparation installation companys new financial information system comprehensive review companys fixed assets conducted result review asset writeoffs 94 million recorded also writedown certain assets made obsolete conversion two west coast refineries produce new california mandated reformulated gasolines amounted 38 million miscellaneous asset writeoffs 1995 amounted 4 million effective 1995 company adopted sfas 121 accounting impairment longlived assets longlived assets disposed adoption standard required noncash charges amounting 659 million tax mostly related impairment writedowns us oil gas producing properties asset dispositions 1996 increased earnings 391 million included 279 million gain companys caltex affiliates sale interests two japanese refineries net 80 million gain sales producing properties north sea indonesia gulf mexico 32 million gain merger companys natural gas marketing business natural gas liquids company ngc corporation 1995 asset dispositions increased earnings net 7 million consisted sales fertilizer plant natural gas storage facility us oil gas property 1994 sale companys lead zinc prospect ireland generated aftertax profit 48 million environmental remediation provisions pertain estimated future costs environmental cleanup programs certain companys service stations marketing terminals refineries chemical locations oil gas properties divested operations chevron liability future cleanup costs sites commonly referred superfund sites company designated prp epa provisions environmental remediation amounted 54 million 1996 90 million 1995 304 million 1994 fs5 prioryear tax adjustments generally result settlement audit issues taxing authorities reevaluation company tax liabilities result new developments also adjustments required effect deferred income taxes changes statutory tax rates federal tax audit settlement 1996 benefited earnings 52 million 1995 charges prioryear tax adjustments 22 million relating primarily change australian income tax rate tax adjustments 1994 increased earnings 344 million including net reversal 301 million tax related interest reserves resulting companys global settlement internal revenue service issues relating years 1979 1987 restructurings reorganizations 1996 resulted charges 14 million various employee severance programs charges 1995 50 million including 12 million related restructurings chevrons caltex affiliate consisted principally employee severance provisions connection reorganizations various business activities 1994 45 million adjustment made prioryear charge connection terms sale philadelphia port arthur texas refineries recognize effect port arthur refinery sale companys chemicals operations philadelphia refinery sold august 1994 port arthur refinery sale completed february 1995 lifo inventory liquidation losses gains result reduction inventories certain inventory pools valued lastin firstout lifo accounting method lifo losses decreased net income 1996 1994 4 million 10 million respectively inventories liquidated historical costs higher costs incurred years lifo effects increased net income 1995 2 million inventories liquidated historical costs lower currentyear costs amounts include companys equity share caltex lifo inventory effects chevrons consolidated petroleum inventories 83 million barrels yearend 1996 93 million barrels yearend 1995 99 million barrels yearend 1994 special items reduced earnings net 78 million 1996 consisting primarily litigation matters offset partially 12 million refund federal lease costs 1995 special items benefited earnings net 84 million gain 86 million related sale land caltex affiliate japan refund 27 million federal lease costs offset partially litigation costs 29 million charges 1994 litigation regulatory settlements 31 million offset partially casualty insurance recovery 20 million results operations 1996 successful year chevron earnings record levels company performed well operationally us international upstream posted record earnings refining marketing business increased operating earnings 28 percent depressed 1995 levels despite market competition prevented higher feedstock fuel costs fully recovered cyclical downturn chemicals industry caused earnings decline 1996 record level 1995 although sales volumes remained strong year lower prices higher feedstock fuel costs resulted lower margins companys major chemical products international oil gas production reserves increased seventh consecutive year 1996 international oil gas production 7 percent company replaced 149 percent international production proved reserve additions resulting worldwide replacement rate 112 percent operating results 1995 compared 1994 strong areas except us downstream operations poor results dampened total earnings chemicals international upstream businesses turned record earnings us upstream earnings declined slightly 1994 higher crude oil prices fully offset low natural gas prices poor industry refining margins coupled scheduled unscheduled maintenance companys core refineries particularly extended turnaround richmond california refinery tie new units required produce new state mandated reformulated fuels resulted severely depressed earnings operations sales operating revenues 428 billion 1996 compared 363 billion 1995 351 billion 1994 revenues improved 1995 1994 primarily higher prices sales volumes crude oil natural gas higher prices refined products partially offset lower refined products sales volumes chemicals prices sharply higher crude oil natural gas refined products prices accounted increase purchased crude oil products costs 1996 compared 1995 1994 fs6 income years included net gains resulting disposition assets caused income fluctuate year operating selling administrative expenses adjusted special items increased slightly 1996 largely higher fuel transportation costs accruals performancebased employee compensation costs offset continued reductions expenses operating expenses 1995 negatively affected scheduled refinery shutdowns maintenance unanticipated costs associated unscheduled refinery shutdowns refinery operating problems also affected operating costs 1995 1994 reported selling general administrative expenses 1994 unusually low due reversal 319 million accrued interest reserves federal income taxes payable resulting companys settlement irs issues nine open tax years year ended december 31 millions dollars 1996 1995 1994 reported operating expenses 6007 5974 6383 reported selling general administrative expenses 1377 1384 963 total operational costs 7384 7358 7346 eliminate special charges tax 437 514 230 adjusted ongoing operational costs 6947 6844 7116 depreciation depletion amortization expense decreased 1996 following 1995 adoption sfas 121 resulted impairment certain companys fixed assets mostly oil gas producing properties 1995 adjustments fixed asset carrying values 1995 expense included special charge implement new standard taxes income 2133 billion 1996 859 million 1995 1110 billion 1994 equating effective income tax rates 45 percent 48 percent 396 percent three years respectively lower tax rate 1996 compared 1995 reflects shift international earnings mix higher taxrate countries lower taxrate countries favorable swing prioryear tax adjustments effects offset partially decrease equity earnings recorded aftertax basis 1995 tax rate reflected shift taxable earnings lower taxrate countries higher taxrate countries increase tax rate offset partially higher tax credits increase equity earnings recorded aftertax basis lower 1994 tax rate attributable effect favorable prioryear tax adjustments resulting global settlement irs issues years 1979 1987 included reversal excess interest reserves little associated tax effect currency transactions decreased net income 26 million 15 million 64 million 1996 1995 1994 respectively amounts include companys share affiliates currency transactions loss currency transactions 1996 resulted fluctuations value united kingdom australian currencies relative us dollar 1995 loss related fluctuations value canadian nigerian currencies 1994 due primarily fluctuations value australian philippine currencies fs7 results major operating areas millions dollars 1996 1995 1994 exploration production united states 1087 72 518 international 1211 690 539 total exploration production 2298 762 1057 refining marketing transportation united states 193 104 40 international 226 345 239 total refining marketing transportation 419 241 279 total petroleum 2717 1003 1336 chemicals 200 484 206 coal minerals 46 18 111 corporate 356 539 40 net income 2607 930 1693 special items major operating areas millions dollars 1996 1995 1994 exploration production united states 22 480 66 international 69 121 20 total exploration production 47 601 46 refining marketing transportation united states 97 179 285 international 59 62 10 total refining marketing transportation 38 117 295 total petroleum 9 718 341 chemicals 28 40 9 coal minerals 2 65 48 corporate 23 209 324 total special items included net income 44 1032 22 us exploration production earnings 1996 excluding special items highest companys history earnings doubled 1995 levels 90 percent 1994 operationally significant improvement us upstream earnings 1996 due higher crude oil natural gas prices compared 1995 1994 offsetting lower liquids production 1995 higher crude oil prices 1994 fully offset effects lower production volumes lower natural gas prices natural gas accounts half companys combined us oil gas production net liquids production 1996 averaged 341000 barrels per day 3 percent 350000 barrels per day 1995 8 percent 369000 barrels per day 1994 net natural gas production 1996 1995 averaged 19 billion cubic feet per day compared 21 billion cubic feet per day 1994 production declines resulted producing property sales normal field declines partially offset new production company several major longterm projects way primarily gulf mexico 1996 fourth quarter stabilized us oil gas production volumes companys average crude oil realizations 1880 per barrel 1996 increase 346 1534 per barrel 1995 nearly 500 1386 per barrel averaged 1994 low point 1103 per barrel december 1993 realizations recovered 1450 1500 range mid1994 remained relatively fs8 steady 1500 1600 1995 1996 chevrons crude oil realizations increased year reaching 2193 december began decline early 1997 us exploration production millions dollars 1996 1995 1994 earnings excluding special items 1109 552 584 asset writeoffs revaluations new accounting standard 490 19 7 asset dispositions 17 2 environmental remediation provisions 10 8 51 restructurings reorganizations 1 lifo inventory losses 4 11 27 11 total special items 22 480 66 reported earnings 1087 72 518 companys average natural gas prices 228 per thousand cubic feet 1996 77 cents 151 1995 51 cents 1994 average 177 low inventories increased demand caused extremely cold weather eastern half united states caused companys natural gas prices peak average 375 december 1996 prices remained strong january 1997 began falling rapidly february winter weather moderated exploration expenses 1996 increased 1995 1994 levels increased exploration activity gulf mexico ongoing depreciation expense declined year result lower production volumes 1996 lower carrying values assets impaired upon implementation sfas 121 international exploration productions record earnings 1996 reflected higher crude oil natural gas sales volumes higher crude oil prices compared 1995 1994 1995 factors contributed increase earnings 1994 also contributing improved results 1995 significantly lower effective tax rates west africa primarily resulting tax benefits associated crude oil reserve additions operationally companys average international liquids prices including equity affiliates increased 1948 per barrel 1610 1995 1486 1994 average natural gas prices 186 per thousand cubic feet 1996 compared 173 184 1995 1994 respectively 1996 net liquids production including production equity affiliates increased 8 percent 1995 702000 barrels per day 13 percent 1994 production levels production growth angola nigeria kazakstan new production congo accounted increase net natural gas production volumes also increased 1996 3 percent 1995 584 million cubic feet per day 7 percent 1994 levels production crude oil natural gas increasing steadily since late 1980s reflecting companys successful strategy growing international operations fs9 international exploration production millions dollars 1996 1995 1994 earnings excluding special items 1142 811 519 asset writeoffs revaluations new accounting standard 81 17 asset dispositions 91 prioryear tax adjustments 22 20 restructurings reorganizations 5 10 lifo inventory losses 1 7 total special items 69 121 20 reported earnings 1211 690 539 selected operating data 1996 1995 1994 us exploration production net crude oil natural gas liquids production mbpd 341 350 369 net natural gas production mmcfpd 1875 1868 2085 natural gas sales mmcfpd1 3588 2815 2598 natural gas liquids sales mbpd1 187 213 215 revenues net production crude oil bbl 1880 1534 1386 natural gas mcf 228 151 177 international exploration production1 net crude oil natural gas liquids production mbpd 702 651 624 net natural gas production mmcfpd 584 565 546 natural gas sales mmcfpd 778 564 461 natural gas liquids sales mbpd 36 47 34 revenues liftings liquids bbl 1948 1610 1486 natural gas mcf 186 173 184 us refining marketing gasoline sales mbpd 556 552 615 refined products sales mbpd 566 565 699 refinery input mbpd 951 925 1213 average refined products sales price bbl 2994 2619 2437 international refining marketing1 refined products sales mbpd 944 969 934 refinery input mbpd 537 598 623 fs10 chemicals sales operating revenues2 united states 2936 3332 2801 international 605 621 561 worldwide 3541 3953 3362 mbpd thousands barrels per day mmcfpd millions cubic feet per day bbl barrel mcf thousands cubic feet 1 includes equity affiliates 2 millions dollars includes sales chevron companies us refining marketing earnings excluding special items nearly four times greater 1995 levels still 11 percent 1994 results although much improved 1995 us downstream results depressed 1996 competitive conditions many companys markets allow full recovery higher crude oil costs california increased manufacturing cost mandated cleanerburning gasolines market conditions especially difficult late year crude oil prices rose highest level since 1991 persian gulf war price competition especially strong major los angeles market refinery performance improved 1995 introduction new california reformulated gasolines went smoothly supply disruptions extensive scheduled unscheduled refinery maintenance 1995 coupled weak industry refining margins resulted significantly reduced operating earnings compared 1994 addition richmond california refinery shut extended period 1995 fourth quarter upgrades required produce californiamandated cleanerburning gasolines us refining marketing millions dollars 1996 1995 1994 earnings excluding special items 290 75 325 asset writeoffs revaluations new accounting standard 48 112 asset dispositions 4 environmental remediation provisions 29 62 249 restructurings reorganizations 1 7 39 lifo inventory gains 2 3 25 total special items 97 179 285 reported earnings loss 193 104 40 average refined products prices higher 1996 compared 1995 1994 primarily reflecting increase crude oil feedstock manufacturing costs margins continued weak industry refined products availability remained ample margins even worse 1995 poor industry refining margins combined higher maintenance expenses caused extensive refinery downtime also required expensive third party product purchases supply companys marketing system refined product sales volumes 1996 1995 averaged 112 million barrels per day 15 percent 1994 levels largely due sales companys philadelphia refinery august 1994 port arthur texas refinery february 1995 connection major restructuring us refining marketing operations volume declines 1996 1995 occurred primarily unbranded bulk sales whereas volumes sold companys marketing system increased 2 percent 1996 1995 1994 levels international refining marketing earnings include international marine operations equity earnings companys caltex petroleum corporation affiliate addition earnings consolidated refining marketing subsidiaries excluding special items 1996 earnings 167 million decreased 41 percent 1995 levels 33 percent 1994 1996 earnings decline two prior periods due primarily poor refining margins throughout caltexs major operating areas asiapacific region improved results fs11 1995 compared 1994 reflected higher ocean freightrates lower operating expenses companys shipping operations 1994 levels results three years reflected weak industry conditions thatheld product prices resulting shrinking sales margins companys major areas operations particularly united kingdom international refining marketing millions dollars 1996 1995 1994 earnings excluding special items 167 283 249 asset writeoffs revaluations new accounting standard 200 1 asset dispositions 279 environmental remediation provisions 15 restructurings reorganizations 1 17 lifo inventory losses 6 10 80 total special items 59 62 10 reported earnings 226 345 239 international refined products sales volumes decreased 3 percent 1996 increasing preceding six years caltexs sale interest two japanese refineries early 1996 primary reason decline sales volumes caltex refined products sales volumes excluding transactions chevron decreased 10 percent 120 million barrels per day 1996 compared 133 million 1995 decreased 3 percent 124 million barrels per day 1994 equity earnings caltex 408 million 294 million 210 million 1996 1995 1994 respectively 1996 chevrons share caltex earnings included 279 million benefit related sale interest two japanese refineries caltex earnings 1995 included 13 million favorable foreign tax benefits 86 million benefit gain related land sale caltex affiliate japan gains offset partially special items netting 18 million related caltex restructurings asset writeoffs chevrons share caltex earnings benefited 2 million 13 million 15 million 1996 1995 1994 respectively upward adjustments carrying value petroleum inventories reflect market values caltex foreign currency transactions resulted losses 24 million 27 million 1996 1994 respectively gains 26 million 1995 overall international refining marketing foreign currency transactions resulted losses 17 million 19 million 1996 1994 respectively gains 19 million 1995 chemicals earnings excluding special items 228 million 56 percent record 1995 results 524 million 215 million earned 1994 cyclical downturn chemicals industry caused 1996 earnings decline although sales volumes remained strong year lower prices higher feedstock fuel costs resulted lower margins companys major chemical products fs12 chemicals millions dollars 1996 1995 1994 earnings excluding special items 228 524 215 asset writeoffs revaluations new accounting standard 13 12 14 asset dispositions 9 environmental remediation provisions 20 4 restructurings reorganizations 3 6 lifo inventory gains 1 16 total special items 28 40 9 reported earnings 200 484 206 coal minerals earnings excluding special items flat 48 million compared 47 million 1995 24 percent 1994 results coal earnings depressed 1996 1995 abundance lowcost hydroelectric power western united states resulting low coal demand low prices years compared 1994 sales 16 million tons 6 percent 17 million tons 1995 20 percent 20 million tons 1994 coal minerals millions dollars 1996 1995 1994 earnings excluding special items 48 47 63 asset writeoffs revaluations new accounting standard 63 asset dispositions 48 restructurings reorganizations 2 total special items 2 65 48 reported earnings loss 46 18 111 corporate activities include interest expense interest income cash marketable securities real estate insurance operations corporate center costs corporate net operating charges excluding special items flat 1995 foreign currency gains lower interest expense offset higher insurance reserve adjustments accruals performancebased employee compensation costs corporate costs increased 1995 1994 levels higher interest rates lower earnings real estate operations offset lower corporate overhead expenses interest expense lower 1996 1995 level 1994 primary reason interest expense decline 1996 1995 decrease debt levels two years 1995 higher debt levels higher interest rates 1994 corporate millions dollars 1996 1995 1994 charges excluding special items 333 330 284 asset writeoffs revaluations new accounting standard 12 41 170 prioryear tax adjustments 52 324 restructurings reorganizations 8 11 26 16 total special items 23 209 324 reported loss earnings 356 539 40 fs13 liquidity capital resources cash equivalents marketable securities totaled 1637 billion yearend 1996 increase 243 million yearend 1995 cash provided operating activities 1996 5797 billion compared 4075 billion 1995 2896 billion 1994 1996 increase reflected higher operating earnings higher cash dividends affiliated companies lower working capital requirements cash operations adequate fund companys capital expenditures dividend payments stockholders together proceeds asset sales enabled company reduce debt level companys debt capital lease obligations totaled 6694 billion december 31 1996 1633 billion 8327 billion yearend 1995 significant debt transactions included repayment approximately 1179 billion shortterm obligations mostly commercial paper early repayment june 1996 280 million 9375 percent coupon debt due june 1 2016 miscellaneous transactions reduced longterm debt capital leases 150 million 1996 chevron formed federally chartered credit card bank primarily responsible issuing credit companys retail customers form branded credit cards part activities bank sells substantially receivables daily basis trust late 1996 524 million credit card receivables sold trust proceeds used reduce commercial paper borrowings companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1 standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service moodys counterparty rating chevron also aa2 ratings denote high quality investmentgrade securities companys future debt level dependent primarily capital spending program business outlook company currently expects debt level increase 1997 believes substantial borrowing capacity meet unanticipated cash requirements december 31 1996 chevron 4425 billion committed credit facilities various major banks facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 1996 addition chevron one subsidiaries existing shelf registrations file securities exchange commission together would permit registered offerings 13 billion debt securities yearend 1996 company classified 18 billion shortterm obligations longterm debt settlement obligations consisting commercial paper expected require use working capital 1997 company intent ability evidenced committed credit arrangements refinance longterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate financial ratios current ratio current assets current liabilities yearend two items negatively affect chevrons current ratio companys opinion affect liquidity included current assets years inventories valued lifo basis yearend 1996 lower current costs 11 billion financial ratios 1996 1995 1994 current ratio 09 08 interest coverage ratio 109 41 76 total debttotal debt plus equity percent 300 367 358 also companys practice continually refinancing commercial paper 36 billion classified shortterm yearend 1996 results large portion shortterm debt outstanding indefinitely interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest fs14 divided tax interest costs chevrons interest coverage ratio improved significantly 1996 due higher beforetax income lower interest expense companys debt ratio total debt total debt plus equity decreased 1996 total debt decreased stockholders equity increased year due significantly higher netincome cash flows capital exploratory expenditures worldwide capital exploratory expenditures 1996 totaled 4840 billion including companys equity share affiliates expenditures exploration production accounted 62 percent total outlays 1996 compared 57 percent 1995 1994 international exploration production spending 61 percent worldwide exploration production expenditures 1996 68 percent 1995 71 percent 1994 reflecting companys efforts stabilize us production continuing focus international exploration production activities company projects 1997 capital exploratory expenditures record 59 billion including chevrons share spending affiliates 22 percent 1996 spending levels 1997 program provides 36 billion exploration production investments 64 percent international projects several longterm development projects gulf mexico designed stabilize us oil gas production account major portion projected 13 billion spent us exploration production refining marketing transportation expenditures estimated 14 billion 800 million planned international projects completion companys us refinery upgrade projects produce californiamandated gasolines majority 600 million 1997 us downstream capital program spent marketing projects international downstream capital program focused highgrowth asia pacific countries companys caltex affiliate major program way upgrade retail marketing system company plans invest 700 million worldwide chemicals business 40 percent 1996 spending forwardlooking statements annual report contains forwardlooking statements relating chevrons operations based managements current expectations estimates projections petroleum chemicals industries words expects intends plans projects believes estimates similar expressions used identify forwardlooking statements guarantees future performance involve certain risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecast forwardlooking statements among factors could cause actual results differ materially crude oil natural gas prices refining margins marketing margins chemicals prices competitive conditions affecting supply demand companys aromatics olefins additives products potential failure achieve expected production existing future oil gas development projects potential disruption interruption companys production manufacturing facilities due accidents political events potential liability remedial actions existing future environmental regulations potential liability resulting pending future litigation addition statements could affected general domestic international economic political conditions fs15 quarterly results stock market data unaudited report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements assuring integrity objectivity statements prepared accordance generally accepted accounting principles fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited price waterhouse llp independent accountants selected audit committee approved stockholders management made available price waterhouse llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management skenneth derr smartin r klitten sstephen j crowe kenneth derr martin r klitten stephen j crowe chairman board vice president comptroller chief executive officer chief financial officer february 21 1997 fs16 consolidated statement income year ended december 31 millions dollars except pershare amounts 1996 1995 1994 revenues sales operating revenues 42782 36310 35130 equity net income affiliated companies 767 553 440 income 344 219 284 total revenues 43893 37082 35854 costs deductions purchased crude oil products 22826 18033 16990 operating expenses 6007 5974 6383 selling general administrative expenses 1377 1384 963 exploration expenses 455 372 379 depreciation depletion amortization 2216 3381 2431 taxes income 5908 5748 5559 interest debt expense 364 401 346 total costs deductions 39153 35293 33051 income tax expense 4740 1789 2803 income tax expense 2133 859 1110 net income 2607 930 1693 net income per share common stock 399 143 260 weighted average number shares outstanding 652769250 652083804 651672238 includes consumer excise taxes 5202 4988 4790 see accompanying notes consolidated financial statements report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheet related consolidated statements incomestockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1996 1995 results operations cash flows three years period ended december 31 1996 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed discussed note 3 consolidated financial statements effective october 1 1995 company changed method accounting impairment longlived assets comply provisions statement financial accounting standards 121 sprice waterhouse llp san francisco california february 21 1997 fs17 consolidated balance sheet december 31 millions dollars 1996 1995 assets cash equivalents 892 621 marketable securities 745 773 accounts notes receivable less allowance 1996 71 1995 69 4035 4014 inventories crude oil petroleum products 669 822 chemicals 507 487 materials supplies 255 289 1431 1598 prepaid expenses current assets 839 861 total current assets 7942 7867 longterm receivables 261 149 investments advances 4463 4087 properties plant equipment cost 46936 48031 less accumulated depreciation depletion amortization 25440 26335 21496 21696 deferred charges assets 692 531 total assets 34854 34330 liabilities stockholders equity shortterm debt 2706 3806 accounts payable 3502 3294 accrued liabilities 1420 1257 federal taxes income 745 558 taxes payable 534 530 total current liabilities 8907 9445 longterm debt 3650 4133 capital lease obligations 338 388 deferred credits noncurrent obligations 1858 1992 noncurrent deferred income taxes 2851 2433 reserves employee benefit plans 1627 1584 total liabilities 19231 19975 preferred stock authorized 100000000 shares 100 par value none issued common stock authorized 1000000000 shares 150 par value 712487068 shares issued 1069 capital excess par value 1874 1863 deferred compensation employee stock ownership plan esop 800 850 currency translation adjustment 96 174 retained earnings 15408 14146 treasury stock cost 1996 59401015 shares 1995 60160057 shares 2024 2047 total stockholders equity 15623 14355 total liabilities stockholders equity 34854 34330 see accompanying notes consolidated financial statements fs18 consolidated statement cash flows year ended december 31 millions dollars 1996 1995 1994 operating activities net income 2607 930 1693 adjustments depreciation depletion amortization 2216 3381 2431 dry hole expense related prior years expenditures 55 19 53 distributions greater less equity affiliates income 61 132 55 net beforetax losses gains asset retirements sales 207 164 83 net foreign exchange gains losses 10 47 40 deferred income tax provision 359 258 110 net decrease increasein operating working capital1 641 40 1773 339 116 480 net cash provided operating activities2 5797 4075 2896 investing activities capital expenditures 3424 3529 3405 proceeds asset sales 778 581 731 net sales purchases marketable securities3 44 144 545 net cash used investing activities 2602 2804 3219 financing activities net repayments borrowings shortterm obligations 1179 227 466 proceeds issuance longterm debt 95 536 436 repayments longterm debt financing obligations 476 103 588 cash dividends paid 1358 1255 1206 purchases treasury shares 4 5 net cash used financing activities 2922 1053 897 effect exchange rate changes cash equivalents 2 10 11 net change cash equivalents 271 208 1231 cash equivalents beginning year 621 413 1644 cash equivalents yearend 892 621 413 see accompanying notes consolidated financial statements 1 net decrease increase operating working capital composed following decrease increase accounts notes receivable 30 62 44 decrease increase inventories 60 162 57 decrease increase prepaid expenses current assets 15 148 4 increase decrease accounts payable accrued liabilities 369 428 1510 increase decrease income taxes payable 167 16 166 net decrease increase operating working capital 641 40 1773 2 net cash provided operating activities includes following cash payments interest income taxes interest paid debt net capitalized interest 361 373 339 income taxes paid 1595 1176 1147 3 net sales purchases marketable securities consists following gross amounts marketable securities purchased 3443 2759 1943 marketable securities sold 3487 2903 1398 net sales purchases marketable securities 44 144 545 fs19 consolidated statement stockholders equity fs20 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies chevron corporation international company subsidiaries affiliates engages fully integrated petroleum operations chemical operations coal mining united states approximately 90 countries petroleum operations consist exploring developing producing crude oil natural gas transporting crude oil natural gas products pipelines marine vessels motor equipment refining crude oil finished petroleum products marketing crude oil natural gas refined petroleum products chemicals operations include manufacture marketing wide range chemicals industrial uses preparing consolidated financial statements company follows accounting policies accordance generally accepted accounting principles united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature companys operations many countries operates subject changing economic regulatory political conditions also company imports crude oil us refining operations company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percentowned investments advances affiliates company substantial ownership interest approximately 20 50 percent company exercises significant influence policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method accounting used oil gas exploration production activities derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income gains losses derivatives contracts qualify hedges recognized currently income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities inventories crude oil petroleum products chemicals stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment costs development wells related plant equipment including carbon dioxide certain injected materials used enhanced recovery projects mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed beginning 1995 longlived assets including proved oil gas properties assessed possible impairment accordance provisions statement financial accounting standards sfas 121 standard occurrence certain events downward revision proved oil gas reserves may trigger review affected assets possible impairment proved oil gas properties company would typically perform review individual field basis impairment amounts recorded incremental depreciation expense period specific event occurred prior adoption sfas 121 proved oil gas properties regularly assessed possible impairment aggregate worldwide portfolio basis applying informal ceiling test securities exchange commission depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitof production method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets fs21 gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized environmental expenditures environmental expenditures relate current ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs current dollars using currently available technology applying current regulations well companys internal environmental policies future amounts discounted recoveries reimbursements recorded asset receipt reasonably assured currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions currently included income cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely stock compensation company applies accounting principles board apb opinion 25 related interpretations accounting stock options presents note 18 pro forma net income earnings per share data accounting prescribed sfas 123 applied note 2 special items financial information net income affected transactions unrelated representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net decrease increase net income related tax effects year ended december 31 millions dollars 1996 1995 1994 asset writeoffs revaluations uk refining marketing 200 asset impairments 68 real estate development assets 29 168 new accounting standard sfas 121 659 adjustment fixed assets records 94 refining assets 38 40 4 337 963 asset dispositions net caltex sale two refineries 279 oil gas properties 80 6 ngc merger 32 lead zinc property ireland 48 1 391 7 48 environmental remediation provisions 54 90 304 prioryear tax adjustments 52 22 344 restructurings reorganizations workforce reductions 14 38 caltex 12 us refining marketing chemicals 45 14 50 45 lifo inventory losses gains 4 2 10 net litigation regulatory issues 90 23 31 federal lease cost refund 12 27 caltex gain related land sale 86 miscellaneous net 6 20 78 84 11 total special items tax 44 1032 22 1996 company recorded 200 million estimated impairment provision connection decision merge united kingdom refining marketing operations two oil companies 1997 preliminary estimate subject final valuation assets operations material chevrons net income 1996 fs22 financial information follows year ended december 31 1996 1995 1994 total financing interest debt costs 472 543 419 less capitalized interest 108 142 73 interest debt expense 364 401 346 research development expenses 182 185 179 currency transaction losses 26 15 64 includes 28 25 24 1996 1995 1994 respectively companys share affiliates currency transaction effects excess current cost based average acquisition costs year carrying value inventories lifo method used 1122 917 684 december 31 1996 1995 1994 respectively note 3 adoption statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed effective october 1 1995 company affiliates adopted sfas 121 issued financial accounting standards board adoption standard required noncash charges 1995 net income amounting 659 101 per share related income tax benefits 358 mostly related impairment writedowns us oil gas producing properties note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following noncash transactions 1996 company merged substantially natural gas liquids natural gas marketing businesses ngc corporation company received cash note shares ngc corporation common stock participating preferred stock exchange contribution net assets ngc cash received included consolidated statement cash flows proceeds asset sales increase investments advances merger considered noncash transaction primarily resulted contribution properties plant equipment companys employee stock ownership plan esop repaid 50 40 matured debt guaranteed chevron corporation 1996 1995 1994 respectively company reflected payment reductions shortterm debt deferred compensation esop capital lease arrangements 282 65 1995 1994 respectively recorded additions properties plant equipment capital lease obligations noncash transactions occurred years presented include acquisition longterm debt exchange termination capital lease obligation reissuance treasury shares management compensation plans changes assets liabilities stockholders equity resulting accounting companys esop minimum pension liability market value adjustments investments amounts transactions material aggregate relation companys financial position major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented year ended december 31 1996 1995 1994 additions properties plant equipment 3250 3611 3112 additions investments 195 44 284 payments liabilities assets net 21 126 9 capital expenditures 3424 3529 3405 expensed exploration expenditures 400 354 326 payments longterm debt financing obligations 33 5 242 capital exploratory expenditures excluding equity companies 3857 3888 3973 excludes noncash capital lease additions 282 65 1995 1994 respectively note 5 stockholders equity retained earnings december 31 1996 1995 include 2357 2363 respectively companys share undistributed earnings equity affiliates 1988 company declared dividend distribution one right outstanding share common stock rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company right entitles holder purchase stock value equal two times exercise price right person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase opportunity rights expire november 1998 may redeemed company 5 cents per share prior date rights voting dividend rights become exercisable dilutive effect earnings company twenty million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1996 made rights exercisable note 6 financial derivative instruments offbalancesheet risk company utilizes variety derivative instruments financial commodity based hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity fs23 derivative instruments used consist mainly crude oil natural gas futures contracts traded new york mercantile exchange international petroleum exchange natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated crude oil natural gas purchases sales generally forecast occur within 60 90day period natural gas swaps used primarily hedge firmly committed sales terms swap contracts held yearend 1996 average remaining maturity 59 months gains losses derivative instruments offset recognized concurrently gains losses underlying commodities 1996 activity relating hedging natural gas declined substantially following merger companys us natural gas liquids natural gas marketing businesses ngc corporation addition company 1996 entered managed program utilizing natural gas options contracts take advantage perceived opportunities favorable price movements commodity results program reflected currently income material 1996 company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures primarily anticipated purchase transactions forecast occur within 90 days company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts made either semiannually annually recorded monthly interest debt expense december 31 1996 seven contracts remaining terms three months nine years concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed various foreign governments wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied companys counterparties derivative instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit principal security obtained support lines credit negotiated contracts financial strength customer considered sufficient fair value fair values derived either quoted market prices available absence present value expected cash flows fair values reflect cash would received paid instruments settled yearend december 31 1996 1995 fair values financial derivative instruments follows longterm debt 1850 2333 estimated fair values 1915 2492 notional principal amounts interest rate swaps totaled 1199 1223 approximate fair values totaling 1 26 notional amounts derivative instruments represent assets liabilities company rather basis settlements contract terms company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 1472 1219 balances 727 446 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities one year derivatives contract notional values 1996 1995 follows crude oil natural gas futures contract values 57 fair values 49 57 forward exchange contracts contract values 231 102 approximating fair values gas swap contracts based notional gas volumes approximately 78 180 billion cubic feet negative fair values totaling 8 33 deferred gains losses accrued consolidated balance sheet material note 7 summarized financial data chevron usa inc december 31 1996 chevron usa inc chevron corporations principal operating company consisting primarily companys us integrated petroleum operations excluding domestic pipeline operations conducted three divisions chevron usa production company chevron products company august 31 1996 warren petroleum company beginning september 1 1996 substantially chevron usa incs natural gas liquids operations previously conducted warren petroleum company natural gas marketing operations previously conducted chevron usa production company carried 28 percent equity ownership ngc corporation summarized financial information chevron usa inc consolidated subsidiaries presented year ended december 31 1996 1995 1994 sales operating revenues 29726 24392 25833 total costs deductions 28331 25177 25367 net income loss 1042 384 501 1995 net income includes 490 companys adoption sfas 121 fs24 december 31 1996 1995 current assets 3126 3426 assets 13209 13666 current liabilities 4035 5800 liabilities 5300 5357 net equity 7000 5935 note 8 litigation company defendant numerous lawsuits including along oil companies actions challenging oil gas royalty severance tax payments based posted prices plaintiffs may seek recover large sometimes unspecified amounts matters may remain unresolved several years practical estimate range possible loss companys litigation matters losses could material respect earnings given period however management opinion resolution lawsuits result significant liability company relation consolidated financial position liquidity oxy usa brought lawsuit capacity successor interest cities service company involved claims damages resulting allegedly improper termination tender offer purchase cities stock 1982 made gulf oil corporation acquired chevron 1984 trial respect claims ended july 1996 judgment company 742 including interest continues accrue company filed appeal ultimate outcome matter cannot determined presently certainty company believes errors committed trial court result judgment reversed appeal note 9 summarized financial data chevron transport corporation chevron transport corporation ctc liberian corporation indirect wholly owned subsidiary chevron corporation ctc principal operator chevrons international tanker fleet engaged marine transportation oil refined petroleum products ctcs shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiarys obligations connection certain debt securities ctc deemed issuer accordance securities exchange commissions disclosure requirements summarized financial information ctc consolidated subsidiaries presented information derived financial statements prepared standalone basis conformity generally accepted accounting principles separate financial statements disclosures respect ctc omitted separate financial statements disclosures material investors debt securities deemed issued ctc restrictions ctcs ability pay dividends make loans advances december 31 1996 year ended december 31 1996 1995 1994 sales operating revenues 512 462 440 total costs deductions 564 477 504 net income loss 11 23 58 december 31 1996 1995 current assets 99 37 assets 1622 1561 current liabilities 617 459 liabilities 385 431 net equity 719 708 note 10 geographic segment data geographic segment distributions companys identifiable assets operating income sales operating revenues summarized following tables year ended december 31 1996 1995 1994 identifiable assets united states petroleum 14226 14521 15540 chemicals 2475 2115 1992 coal minerals 477 503 592 total united states 17178 17139 18124 international petroleum 13893 13392 12493 chemicals 514 409 411 coal minerals 34 28 45 total international 14441 13829 12949 total identifiable assets 31619 30968 31073 corporate 3235 3362 3334 total assets 34854 34330 34407 identifiable assets business segments include assets associated operations indicated geographic areas including investments affiliates corporate identifiable assets consist primarily cash marketable securities corporate real estate information systems year ended december 31 1996 1995 1994 operating income united states petroleum 1922 64 831 chemicals 219 689 241 coal minerals 58 42 60 total united states 2199 583 1132 international petroleum 3099 2074 1672 chemicals 80 96 81 coal minerals 6 3 79 total international 3185 2173 1832 total operating income 5384 2756 2964 corporate 644 967 161 income tax expense 2133 859 1110 net income 2607 930 1693 fs25 operating income 1995 included asset impairment writedowns 998 connection adoption sfas 121 follows us petroleum 754 us chemicals 20 us coal minerals 97 international petroleum 127 corporate included writedown 19 year ended december 31 1996 1995 1994 sales operating revenues united states petroleumrefined products 12295 10677 11690 crude oil 4836 3850 3466 natural gas 2741 1604 1755 natural gas liquids 992 1130 1072 683 717 637 excise taxes 3231 2999 2977 intersegment 587 676 977 total petroleum 25365 21653 22574 chemicalsproducts 2831 3157 2528 intersegment 105 175 273 total chemicals 2936 3332 2801 coal minerals 329 350 415 total united states 28630 25335 25790 international petroleumrefined products 3490 2794 2638 crude oil 7561 5526 4783 natural gas 558 415 383 natural gas liquids 175 155 108 501 429 307 excise taxes 1959 1977 1797 intersegment 3 2 total petroleum 14247 11296 10014 chemicalsproducts 591 600 537 excise taxes 12 16 intersegment 2 9 8 total chemicals 605 621 561 coal minerals 11 7 1 total international 14863 11924 10576 intersegment sales elimination 697 860 1256 corporate 14 89 20 total sales operating revenues 42782 36310 35130 memo intergeographic sales united states 695 565 512 international 1319 1077 1803 sales operating revenues petroleum segments derived production sale crude oil natural gas natural gas liquids refining marketing petroleum products company also obtains revenues transportation trading crude oil refined products chemicals revenues result primarily sale petrochemicals plastic resins lube oil fuel additives coal minerals revenues relate primarily coal sales companys real estate insurance operations worldwide cash management financing activities corporate 1996 company completed sale real estate development assets sales operating revenues preceding table include sales unaffiliated customers sales transfer products segments sales transfer products segments geographic areas generally estimated market prices transfers geographic areas presented memo items table equity earnings affiliated companies associated segments affiliates operate sales caltex group ngc corporation included international petroleum united states petroleum segments respectively information caltex tengizchevroil ngc affiliates presented note 12 affiliates either material vertically integrated segments operations note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows december 31 1996 1995 petroleum exploration production 6 46 refining marketing transportation 806 833 812 879 less accumulated amortization 389 403 net capitalized leased assets 423 476 december 31 1996 future minimum lease payments operating capital leases follows december 31 operating capital year leases 1997 159 81 1998 141 78 1999 143 73 2000 133 65 2001 131 59 thereafter 234 813 total 941 1169 less amounts representing interest executory costs 521 net present values 648 less capital lease obligations included shortterm debt 310 longterm capital lease obligations 338 future sublease rental income 16 rental expenses incurred operating leases 1996 1995 1994 follows year ended december 31 1996 1995 1994 minimum rentals 438 403 410 contingent rentals 6 9 7 total 444 412 417 less sublease rental income 15 14 net rental expense 429 398 403 fs26 contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time note 12 investments advances investments advances companies accounted using equity method investments accounted cost follows december 31 1996 1995 equity method affiliates caltex group exploration production 449 446 refining marketing transportation 1815 2032 total caltex group 2264 2478 tengizchevroil 1240 1153 ngc corporation 416 affiliates 364 293 4284 3924 cost 179 163 total investments advances 4463 4087 chevron owns 50 percent pt caltex pacific indonesia cpi exploration production company operating indonesia caltex petroleum corporation cpc subsidiaries affiliates conducts refining marketing activities asia africa middle east australia new zealand american overseas petroleum limited subsidiary manages certain companys operations indonesia companies subsidiaries affiliates collectively called caltex group tengizchevroil tco 50 percentowned joint venture formed 1993 republic kazakstan develop tengiz korolev oil fields 40year period january 1997 chevron reached agreement principle sell 5 percent interest tco affiliate lukoil russian oil company arco sale reduces chevrons ownership 45 percent investment tco december 31 1996 1995 included deferred payment portion 428 461 respectively 420 payable republic kazakstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity portion investment recorded upon formation venture company believed time continues believe payment beyond reasonable doubt given original intent continuing commitment parties realizing full potential venture 40year life chevron owns 28 percent ngc corporation ngc gatherer processor transporter marketer energy products north america united kingdom including natural gas natural gas liquids crude oil electricity market value chevrons shares ngc common stock december 31 1996 902 based quoted market prices equity earnings companies accounted equity method together dividends similar distributions received equity method companies years 1996 1995 1994 follows year ended december 31 equity earnings dividends 1996 1995 1994 1996 1995 1994 caltex exploration production 188 156 140 refining marketing transportation 408 294 210 total caltex group 596 450 350 735 305 239 tengizchevroil 110 1 10 ngc corporation 19 1 affiliates 42 102 100 92 116 146 total 767 553 440 828 421 385 companys transactions affiliated companies summarized following table primarily purchase indonesian crude oil cpi sale crude oil products cpcs refining marketing companies sale natural gas ngc purchase natural gas natural gas liquids ngc accounts notes receivable consolidated balance sheet include 258 144 december 31 1996 1995 respectively amounts due affiliated companies accounts payable include 39 37 december 31 1996 1995 respectively amounts due affiliated companies year ended december 31 1996 1995 1994 sales caltex group 1708 1330 1166 sales ngc 676 sales affiliates 18 10 7 total sales affiliates 2402 1340 1173 purchases caltex group 1022 934 800 purchases ngc 269 purchases affiliates 41 40 52 total purchases affiliates 1332 974 852 following tables summarize combined financial information caltex group equity method companies together chevrons share amounts shown affiliates 100 percent increases combined financial information amounts affiliates 1996 due inclusion ngc fs27 note 14 taxes year ended december 31 1996 1995 1994 taxes income united states excise taxes products merchandise 3231 2999 2978 property miscellaneous taxes 274 341 395 payroll taxes 123 127 112 taxes production 121 105 102 total united states 3749 3572 3587 international excise taxes products merchandise 1971 1989 1812 property miscellaneous taxes 157 146 127 payroll taxes 26 30 19 taxes production 5 11 14 total international 2159 2176 1972 total taxes income 5908 5748 5559 year ended december 31 1996 1995 1994 taxes income us federal current 360 152 175 deferred 165 289 43 state local 59 29 10 total united states 584 108 228 international current 1356 937 815 deferred 193 14 67 deferred adjustment enacted changes tax lawsrates 16 total international 1549 967 882 total taxes income 2133 859 1110 us federal income tax expense reduced 77 68 60 1996 1995 1994 respectively lowincome housing business tax credits fs28 1996 beforetax income loss including related corporate charges us operations 1631 compared 331 1995 1194 1994 international operations 3109 2120 1609 1996 1995 1994 respectively deferred income tax provisions included costs benefits 204 75 475 related properties plant equipment 1996 1995 1994 respectively benefits recorded 1995 358 related impairment longlived assets 91 related provision expected loss exiting real estate development business companys effective income tax rate varied us statutory federal income tax rate following year ended december 31 1996 1995 1994 statutory us federal income tax rate 350 effect income taxes international operations excess taxes us statutory rate 168 262 185 state local taxes income net us federal income tax benefit 09 02 prioryear tax adjustments 02 03 44 tax credits 16 38 21 36 31 32 consolidated companies 473 555 440 effect recording equity income certain affiliated companies aftertax basis 23 75 44 effective tax rate 450 480 396 company records deferred taxes tax jurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1996 1995 deferred taxes classified consolidated balance sheet follows december 31 1996 1995 prepaid expenses current assets 136 139 deferred charges assets 163 138 federal taxes income 3 11 noncurrent deferred income taxes 2851 2433 total deferred income taxes net 2555 2167 reported deferred tax balances composed following deferred tax liabilities assets december 31 1996 1995 properties plant equipment 4534 4442 inventory 193 182 miscellaneous 195 277 deferred tax liabilities 4922 4901 abandonmentenvironmental reserves 1052 1169 employee benefits 561 567 amtother tax credits 586 816 accrued liabilities 332 240 miscellaneous 523 649 deferred tax assets 3054 3441 deferred tax assets valuation allowance 687 707 total deferred taxes net 2555 2167 companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 4420 december 31 1996 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 197 would payable upon remittance earnings note 15 shortterm debt december 31 1996 1995 commercial paper1 3583 4808 current maturities longterm debt 269 143 current maturities longterm capital leases 36 42 redeemable longterm obligations longterm debt 315 capital leases 274 273 notes payable 29 25 subtotal2 4506 5606 reclassified longterm debt 1800 total shortterm debt 2706 3806 1weighted average interest rates december 31 1996 1995 59 60 respectively including effect interest rate swaps 2weighted average interest rates december 31 1996 1995 56 59 respectively including effect interest rate swaps redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company entered interest rate swaps portion shortterm debt december 31 1996 1995 company agreed swap notional amounts 1050 floating rate debt fixed rates addition fs29 december 31 1996 company swapped 149 debt classified current maturities longterm debt fixed rate floating rate effect swaps companys interest expense material note 16 longterm debt chevron one wholly owned subsidiaries shelf registrations file securities exchange commission together would permit issuance 1300 debt securities pursuant rule 415 securities act 1933 yearend 1996 company 4425 committed credit facilities banks worldwide 1800 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings agreements based either london interbank offered rate reserve adjusted domestic certificate deposit rate amounts outstanding credit agreements year yearend december 31 1996 1995 company classified 1800 shortterm debt longterm settlement obligations expected require use working capital 1997 company intent ability refinance debt longterm basis december 31 1996 1995 811 amortizing notes due 20041 750 745 notes due 2004 349 348 9375 sinkingfund debentures due 20162 278 761 amortizing bank loans due 2003 225 160 56 notes due 1998 190 975 sinkingfund debentures due 2017 180 4625 200 million swiss franc issue due 19973 149 173 692 notes due 2005 51 728 notes due 19971 50 692 notes due 19961 50 foreign currency obligations 414 88 80 longterm debt 734 87 166 total including debt due within one year 2119 2476 debt due within one year 269 143 reclassified shortterm debt 1800 total longterm debt 3650 4133 1guarantee esop debt 2redeemed 1996 3an interest rate swap effectively changed fixed interest rate floating rate 224 yearend 1996 1995 4less 50 individually weighted average interest rates december 31 1996 consolidated longterm debt maturing five years december 31 1996 follows 1997269 1998303 1999122 2000123 2001 136 note 17 employee benefit plans pension plans company defined benefit pension plans employees principal plans provide automatic membership noncontributory basis retirement benefits provided plans based primarily years service average career earnings highest consecutive three years average earnings companys policy fund least minimum necessary satisfy requirements employee retirement income security act net pension expense credit companys pension plans years 1996 1995 1994 consisted 1996 1995 1994 cost benefits earned year 104 99 97 interest cost projected benefit obligations 271 273 263 actual return plan assets 503 728 62 net amortization deferral 129 342 294 net pension expense credit 1 14 4 settlement gains 1996 1995 1994 related lumpsum payments totaled 28 7 17 respectively december 31 1996 1995 weighted average discount rates long term rates compensation increases used estimating benefit obligations expected rates return plan assets follows 1996 1995 assumed discount rates 77 74 assumed rates compensation increases 52 51 expected return plan assets 91 pension plans assets consist primarily common stocks bonds cash equivalents interests real estate investment funds funded status companys combined plans december 31 1996 1995 follows plans assets accumulated excess benefits accumulated excess benefits plan assets december 31 1996 1995 1996 1995 actuarial present value vested benefit obligations 2932 2961 231 218 accumulated benefit obligations 3072 3085 237 230 projected benefit obligations 3515 3557 270 259 plan assets fair values 4156 4020 7 13 plan assets greater less projected benefit obligations 641 463 263 246 unrecognized net transition assets liabilities 169 240 13 15 unrecognized net gains losses 176 29 68 65 unrecognized priorservice costs 79 94 6 9 minimum liability adjustment 67 75 net pension cost prepaid accrued 375 288 243 232 net transition assets liabilities generally amortized straightline method 15 years profit sharingsavings plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan charges expense profit sharing part profit sharingsavings plan savings plus plan merged profit sharingsavings plan end fs30 1995 shareholdersapproval 92 99 75 1996 1995 1994 respectively employee stock ownership plan esop december 1989 company established leveraged esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock esop provides partial prefunding companys future commitments profit sharing part plan result annual income tax savings company esop expected satisfy companys obligations profit sharing part plan next eight years allowed aicpa statement position sop 936 company elected continue practices based sop 763 subsequent consensus emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations company recorded expense esop 61 67 42 1996 1995 1994 respectively including 65 68 71 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 53 50 1996 1995 1994 respectively company made contributions esop 62 69 63 1996 1995 1994 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated profit sharing accounts plan participants based debt service deemed paid year proportion total current year remaining debt service compensation expense 4 1 10 1996 1995 1994 respectively esop shares december 31 1996 follows thousands 1996 1995 allocated shares 7805 7223 unallocated shares 17682 19490 total esop shares 25487 26713 management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units beginning awards deferred 1996 stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants charges expense combined management incentive plans excluding expense related ltip stock options discussed note 18 stock options 36 45 31 1996 1995 1994 respectively chevron success sharing january 1995 company established program provides eligible employees annual cash bonus company achieves certain financial safety goals total payout opportunity program 8 percent employees salary 1996 payout ranged 39 60 percent employees salaries payout program 1995 benefit plans addition providing pension benefits company makes contributions toward certain health care life insurance plans active qualifying retired employees substantially employees united states certain international locations may become eligible coverage benefit plans companys annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonpension postretirement benefits prefunded company paid incurred accumulated postretirement benefit obligation apbo unrecognized gains losses plans recorded consolidated balance sheet follows december 31 1996 december 31 1995 health life total health life total apbo retirees 456 327 783 467 328 795 fully eligible active participants 142 75 217 144 81 225 active participants 192 44 236 211 51 262 total apbo 790 446 1236 822 460 1282 fair value plan assets apbo greater plan assets 790 446 1236 822 460 1282 unrecognized net gain loss 226 4 230 179 25 154 accrued postretirement benefit costs 1016 4501466 1001 4351436 fs31 companys net postretirement benefits expense follows 1996 1995 1994 health life total health life total health life total cost benefits earned year 16 3 19 15 3 18 23 4 27 interest cost benefit obligation 58 33 91 67 30 97 71 31 102 net amortization gain 8 9 2 11 net expense post retirement benefits 66 36 102 73 31 104 94 35 129 measurement purposes separate health care costtrend rates utilized preage 65 postage 65 retirees 1997 annual rates change assumed 10 percent 37 percent respectively increasing 62 percent 52 percent 1998 gradually decreasing thereafter average ultimate rates 55 percent 2007 preage 65 45 percent 2007 postage 65 increase assumed health care costtrend rates 1 percent year would increase aggregate service interest costs year 1996 19 would increase december 31 1996 apbo 103 december 31 1996 weighted average discount rate 75 percent assumed rate compensation increase related measurement life insurance benefit 50 percent note 18 stock options company applies apb opinion 25 related interpretations accounting stock options awarded broadbased employee stock option plan longterm incentive plan described compensation cost companys stock options determined based fair market value grant dates awards consistent methodology prescribed sfas 123 accounting stockbased compensation companys net income earnings per share 1996 1995 would pro forma amounts indicated 1996 1995 net income reported 2607 930 pro forma 2610 925 earnings per share reported 399 143 pro forma 400 142 effects applying sfas 123 pro forma disclosure indicative future amounts sfas 123 apply awards granted prior 1995 addition certain options vest several years awards future years whose terms conditions may vary anticipated longterm incentive plan stock options granted ltip generally awarded market price date grant exercisable earlier one year later 10 years date grant however portion ltip options granted 1996 terms similar broad based employee stock options described maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year summary status stock options awarded companys ltip excluding awards granted terms similar broadbased employee stock options 1996 1995 1994 presented weighted average options exercise 000s price outstanding december 31 1993 4300 3767 granted 1770 4238 exercised 140 3502 forfeited 88 4256 outstanding december 311994 5842 3908 granted 1823 4815 exercised 498 3709 forfeited 83 4777 outstanding december 31 1995 7084 4146 granted 943 6608 exercised 698 3891 forfeited 66 4938 outstanding december 31 1996 7263 4482 exercisable december 31 1994 4149 3774 1995 5336 3926 1996 6326 4168 weightedaverage fair market value options granted 1996 1995 1418 906 respectively fair market value option granted estimated date grant using blackscholes optionpricing model following assumptions 1996 1995 respectively riskfree interest rate 64 60 percent dividend yield 33 39 percent volatility 161 173 percent expected life 7 years december 31 1996 7262857 shares option exercise prices ranging 319375 6625 per share following table summarizes information stock options outstanding ltip excluding awards granted terms similar broadbased employee stock options december 31 1996 fs32 options outstanding options exercisable weighted average weighted range number remaining average number average exercise outstanding contractual exercise exercisable exercise prices 000s life years price 000s price 31 36 2003 470 3469 2003 3469 36 41 25 494 3722 25 3722 41 46 2688 707 4303 2688 4303 46 51 1610 855 4818 1610 4818 51 56 1 908 5188 56 61 17 940 5796 61 67 919 983 6625 31 67 7263 709 4482 6326 4168 broadbased employee stock options 1996 company granted eligible employees option 150 shares stock equivalents become vested december 31 1998 price chevron stock closes 7500 per share three consecutive business days company highest annual total stockholder return competitor group years 1994 1998 employees receiving stock options may exercise options cash purchase stock brokercoordinated stock sale latter form exercise employees may discretion exercise options first date options become vested options expire march 31 1999 whether exercised addition portion awards granted ltip terms similar broadbased employee stock options 7211600 shares including similartermed ltip awards granted year exercise price 51875 per share forfeitures options 302500 shares reduced outstanding option shares 6909100 yearend date none exercisable apb opinion 25 company recorded expense 29 options 1996 fair market value option share date grant sfas 123 estimated 566 using binomial optionpricing model following assumptions riskfree interest rate 51 percent dividend yield 42 percent expected life 3 years volatility 209 percent note 19 contingent liabilities commitments us federal income tax california franchise tax liabilities company settled 1982 1991 respectively federal income tax purposes issues creditability taxes paid government indonesia resolved 1987 amounts dispute internal revenue service significant settlement open tax matters expected material effect consolidated net assets liquidity company opinion management adequate provision made income franchise taxes years either examination subject future examination december 31 1996 company subsidiaries direct indirect guarantors contingent liabilities 64 notes affiliated companies 68 notes others company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers financing arrangements aggregate amount required payments various commitments 1997174 1998191 1999203 2000 153 2001145 2002 after889 total payments agreements 177 1996 173 1995 154 1994 company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemical concerns companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys related operations results carefully considered management evaluating level current future activity countries areas company significant operations include united states canada australia united kingdom congo angola nigeria zaire papua new guinea china indonesia companys caltex affiliates significant operations indonesia korea japan australia thailand philippines singapore south africa companys tengizchevroil affiliate operates kazakstan fs33 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities sfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables iii provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola congo zaire geographic category includes activities australia united kingdom north sea canada papua new guinea china countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia tengizchevroil tco exploration production partnership operating republic kazakstan table costs incurred exploration property acquisitions development1 affiliated consolidated companies millions dollars us africa total cpi tco worldwide year ended december 1996 exploration wells 357 75 126 558 1 559 geological geophysical 16 37 70 123 8 131 rentals 52 10 54 116 total exploration 425 122 250 797 9 806 property acquisitions2 proved3 5 1 9 15 unproved 62 2 43 107 total property acquisitions 67 3 52 122 development 603 465 594 1662 123 50 1835 total costs incurred 1095 590 896 2581 132 50 2763 year ended december 1995 exploration wells 256 63 141 460 1 461 geological geophysical 9 29 37 75 9 84 rentals 47 11 64 122 total exploration 312 103 242 657 10 667 property acquisitions2 proved3 21 56 77 unproved 31 8 12 51 total property acquisitions 52 64 12 128 development 453 640 568 1661 97 7 1765 total costs incurred 817 807 822 2446 107 7 2560 year ended december 1994 exploration wells 163 48 118 329 geological geophysical 5 29 38 72 9 81 rentals 41 4 71 116 total exploration 209 81 227 517 9 526 property acquisitions2 proved3 95 145 4 244 unproved 28 19 21 68 total property acquisitions 123 164 25 312 development 416 276 503 1195 140 173 1508 total costs incurred 748 521 755 2024 149 173 2346 1 includes costs incurred whether capitalized charged earnings excludes support equipment expenditures 2 proved amounts include wells equipment facilities associated proved reserves unproved represent amounts equipment facilities associated production proved reserves 3 include properties acquired property exchanges fs34 table iii results operations oil gas producing activities1 companys results operations oil gas producing activities years 1996 1995 1994 shown following table net income exploration production activities reported page fs6 reflects income taxes computed effective rate basis accordance sfas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest expense excluded results reported table iii net income amounts page fs6 fs35 fs36 table iv reserve quantities information companys estimated net proved underground oil gas reserves changes thereto years 1996 1995 1994 shown following table proved reserves estimated companys asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually corporations reserves advisory committee ensure rigorous professional standards reserves definitions prescribed securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change time additional information becomes available proved reserves include additional quantities recoverable beyond term lease contract unless renewal reasonably certain may result extensions currently proved areas application secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves tengizchevroil tco companys 50 percentowned affiliate kazakstan include reserves produced dedicated export system place january 1997 chevron agreed sell 10 percent interest tco reducing ownership 45 percent july 1996 company entered 20year operating service agreement 10year extension option maraven unit petroleos de venezuela national oil company operate develop boscan oil field lake maracaibo venezuela currently producing 80000 barrels day plans increase 115000 barrels day chevron receives operating expense reimbursement capital recovery plus interest incentive fee chevron equity ownership oil reserves boscan reserves included companys reserve quantities fs37 table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs38 fs39 fs40 caltex group companies combined financial statements december 31 1996 c1 caltex group companies combined financial statements december 31 1996 index page general information c3 c4 report independent auditors c5 combined balance sheet c6 c7 combined statement income c8 combined statement stockholders equity c9 combined statement cash flows c10 notes combined financial statements c11 c21 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc created 1936 two owners produce transport refine market crude oil petroleum products group comprised following companies caltex petroleum corporation company incorporated delaware many subsidiaries affiliates conducts refining transporting marketing activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas subsidiary provides services manages certain exploration production operations indonesia chevron texaco interests necessarily jointly properties brief description companys operations groups environmental activities follows caltex petroleum corporation caltex subsidiaries affiliates caltex operates approximately 60 countries highest economic petroleum growth rates world principally africa asia middle east new zealand australia year end 1996 caltex 7000 employees 3 located united states majority refining certain marketing operations conducted joint ventures caltex equity interests 14 refineries 11 countries share refinery inputs approximated 743000 barrels per day 1996 caltex continues improve refineries investments designed provide higher yields meet environmental regulations construction new 130000 barrels per day refinery thailand completed operations began july 1996 korea new crude unit capacity 220000 barrels per day 70000 barrel per day diesel desulfurizer completed fourth quarter 1996 bringing total refining capacity lgcaltex 600000 barrels per day caltex companies sold approximately 14 million barrels per day crude petroleum products 1996 caltex continues place emphasis highgrowth markets moving towards better strategic balance refining capacity 1996 caltex sold 50 percent interest nippon petroleum refining company limited approximately 2 billion continues actively manage performance refining assets caltex introduced new corporate retail identity 1996 accelerated downstream marketing activities new refurbished service stations introduced across asiapacific region africa middle east 4100 caltexbranded service stations caltex affiliates operate another 3800 sites names underperforming stations poor prospects improvement eliminated new caltex star mart convenience stores anchor many highvolume station locations many stations also include new ancillary revenue centers quickservice restaurants auto lube bays brushless car washes caltex average 174 market share principal operating areas 1996 addition retail initiatives company created specialized business units helping caltex operating companies position larger shares highgrowth markets lubricating oils greases aviation fuels liquefied petroleum gas caltex conducts international crude oil petroleum product logistics trading operations subsidiary singapore company interest fleet vessels owns equity interests numerous pipelines terminals depots caltex also active petrochemical business particularly japan south korea c3 caltex group companies general information p caltex pacific indonesia cpi holds production sharing contract central sumatra indonesian government granted extension year 2021 cpi also acts operator sumatra four petroleum contract areas 32 fields jointly held chevron texaco exploration pursued area comprising 24 million acres production established giant minas duri fields gross production fields operated cpi 1996 753000 barrels day cpi entitlements sold stockholders use systems sell third parties year end 1996 cpi approximately 6100 employees located indonesia american overseas petroleum limited aopl addition providing services cpi aopl subsidiary amoseas indonesia inc manages selective contract areas texacos chevrons undivided interests indonesia excluding sumatra year end aopl approximated 245 employees 7 located united states environmental activities groups activities subject various environmental health safety regulations countries operates regulations vary significantly degree scope standards enforcement groups policy comply applicable environmental health safety laws regulations well internal policies group active program ensure environmental standards maintained includes closely monitoring applicable statutory regulatory requirements well enforcement policies countries operates conducting periodic environmental compliance audits environmental guidelines definitions promulgated american petroleum institute provide basis reporting groups expenditures year ended december 31 1996 group including equity share affiliates incurred total costs approximately 225 million including capital costs 156 million nonremediation related operating expenses 69 million major component groups expenditures prevention air pollution december 31 1996 group accrued 96 million various known remediation activities including 74 million relating future cost restoring abandoning existing oil gas properties based upon existing statutory regulatory requirements investment operating plans known exposures group believes future environmental expenditures materially affect liquidity financial position results operations c4 report independent auditors stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1996 1995 related combined statements income stockholders equity cash flows years threeyear period ended december 31 1996 combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1996 1995 results operations cash flows years threeyear period ended december 31 1996 conformity generally accepted accounting principles kpmg peat marwick llp dallas texas february 10 1997 c5 caltex group companies combined balance sheet assets december 31 millions dollars 1996 1995 current assets cash equivalents including time deposits 21 1996 60 1995 206 166 accounts notes receivable less allowance doubtful accounts 18 1996 11 1995 trade 864 1002 affiliates 452 210 318 238 1634 1450 inventories crude oil 159 130 petroleum products 503 516 materials supplies 53 61 715 707 deferred income taxes 10 total current assets 2565 2323 investments advances equity affiliates 1842 3163 miscellaneous investments longterm receivables less allowance 8 1995 269 207 total investments advances 2111 3370 property plant equipment cost producing 3721 3485 refining 1550 1468 marketing 2451 2160 8 9 7730 7122 accumulated depreciation depletion amortization 3217 2868 net property plant equipment 4513 4254 prepaid deferred charges 206 170 total assets 9395 10117 see accompanying notes combined financial statements c6 caltex group companies combined balance sheet liabilities stockholders equity december 31 millions dollars 1996 1995 current liabilities shortterm debt 1246 1665 accounts payable trade 1236 1165 stockholders 176 90 affiliates 84 74 1496 1329 accrued liabilities 148 127 estimated income taxes 109 102 total current liabilities 2999 3223 longterm debt 713 628 employee benefit plans 107 98 deferred credits noncurrent liabilities 949 864 deferred income taxes 249 209 minority interest subsidiary companies 122 136 total 5139 5158 stockholders equity common stock 355 capital excess par value 2 retained earnings 3910 4187 currency translation adjustment 36 350 unrealized holding gain investments 25 65 total stockholders equity 4256 4959 total liabilities stockholders equity 9395 10117 see accompanying notes combined financial statements c7 caltex group companies combined statement income year ended december 31 millions dollars 1996 1995 1994 revenues sales operating revenues1 16895 15067 14751 gain sale investment affiliate 1132 equity net income affiliates 51 425 263 dividends interest income 88 130 134 total revenues 18166 15622 15148 costs deductions cost sales operating expenses2 14774 13045 12801 selling general administrative expenses 532 620 568 depreciation depletion amortization 407 361 331 maintenance repairs 134 104 160 foreign exchange net 6 37 73 interest expense 140 159 101 minority interest 2 4 3 total costs deductions 15991 14256 14037 income taxes 2175 1366 1111 provision income taxes 982 467 422 net income 1193 899 689 1 includes sales stockholders 1711 1376 1250 affiliates 2841 1524 1044 2 includes purchases stockholders 2634 1834 1662 affiliates 1297 1638 1587 see accompanying notes combined financial statements c8 caltex group companies combined statement stockholders equity year ended december 31 millions dollars 1996 1995 1994 common stock capital excess par value 357 retained earnings balance beginning year 4187 3898 3688 net income 1193 899 689 cash dividends 1470 610 479 balance end year 3910 4187 3898 currency translation adjustment balance beginning year 350 399 250 sale investment affiliate 240 changes year 146 49 149 balance end year 36 350 399 unrealized holding gain investments balance beginning year 65 79 70 change year 40 14 9 balance end year 25 65 79 total stockholders equity end year 4256 4959 4733 see accompanying notes combined financial statements c9 caltex group companies combined statement cash flows year ended december 31 millions dollars 1996 1995 1994 operating activities net income 1193 899 689 reconciliation net cash provided operating activities depreciation depletion amortization 407 361 331 dividends less equity affiliate income 38 349 220 net losses gains asset sales 10 11 17 deferred income taxes 36 18 45 prepaid charges deferred credits 38 69 115 changes operating working capital 7 27 58 gain sale investment affiliate 1132 12 66 77 net cash provided operating activities 571 1048 988 investing activities capital expenditures 741 663 837 investments advances affiliates 30 150 131 net purchases sales investment instruments 55 7 14 proceeds sale investment affiliate 1984 proceeds asset sales 95 46 37 net cash provided used investing activities 1253 774 917 financing activities debt terms excess three months borrowings 1112 1063 1257 repayments 1351 1093 880 net decrease increase debt 53 275 135 dividends paid including minority interest 1490 617 482 net cash used provided financing activities 1782 372 30 effect exchange rate changes cash equivalents 2 13 16 cash equivalents net change year 40 85 beginning year balance 166 251 166 end year balance 206 166 251 see accompanying notes combined financial statements c10 caltex group companies notes combined financial statements note 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex petroleum corporation subsidiaries american overseas petroleum limited subsidiary pt caltex pacific indonesia intercompany transactions balances eliminated subsidiaries include companies owned directly indirectly 50 percent except cases control rest group chevron corporation texaco inc stockholders subsidiary companies 50 outstanding common shares group companies group primarily engaged exploring producing refining transporting marketing crude oil petroleum products asia pacific eastofsuez regions groups accounting policies accordance united states generally accepted accounting principles translation foreign currencies us dollar functional currency principal subsidiary affiliate operations affiliates japan korea use local currency functional currency estimates preparation financial statements conformity generally accepted accounting principles requires estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results may differ estimates inventories crude oil petroleum product inventories stated cost primarily determined using lastin firstout lifo method costs include applicable acquisition refining costs duties import taxes freight etc materials supplies stated average cost inventories valued lower cost current market investments advances investments affiliates group ownership 20 50 accounted equity method including majority owned investments control rest group groups share earnings losses companies included current results recorded investments reflect underlying equity company investments affiliates carried cost dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing properties including intangible development costs determined using unitofproduction method assets depreciated class straightline basis using rates based upon estimated useful life class asset maintenance repairs necessary maintain facilities operating condition charged income incurred additions improvements materially extend life assets capitalized upon disposal assets net gain loss included income derivative financial instruments gains losses hedges existing assets liabilities included carrying value assets liabilities ultimately recognized income part carrying value gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income included carrying value underlying hedged transaction occurs derivative instrument ceases hedge related gains losses recognized currently income gains losses derivative contracts qualify hedges recognized currently income c11 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued environmental matters groups environmental policies encompass existing laws country group operates groups internal standards expenditures create future benefits contribute future revenue generation capitalized future remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available undiscounted estimates using data primarily developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realizable reclassifications certain amounts preceding periods reclassified conform current years presentation note 2 change accounting principles 1995 group adopted statement financial accounting standards 121 accounting impairment longlived assets long lived assets disposed establishes guidelines recognizing measuring impairment longlived assets adoption standard impact combined financial statements group note 3 inventories excess current cost reported value inventory maintained lifo basis approximately 125 million 52 million december 31 1996 1995 respectively periods presented inventory quantities valued lifo basis reduced certain locations inventory reductions net market valuation adjustments increased net income approximately 4 million 1996 decreased net income 1 million 1995 8 million 1994 certain inventories previously recorded market lower lifo carrying value earnings 29 million 25 million 30 million net inventory volume reductions recorded 1996 1995 1994 respectively reflecting improved market values previous years december 31 1996 substantially inventories recorded cost note 4 equity affiliates investments affiliates equity include following december 31 millions dollars equity 1996 1995 nippon petroleum refining company limited 1132 koa oil company limited 50 364 427 lgcaltex oil corporation formerly honam oil refinery limited 50 739 762 australian petroleum pty limited 50 336 412 star petroleum refining company ltd 64 287 327 various 116 103 1842 3163 c12 caltex group companies notes combined financial statements note 4 equity affiliates continued effective april 1 1996 group sold 50 investment nippon petroleum refining company limited nprc partner nippon oil company limited noc yen 200 billion approximately 2 billion cash groups net income 1996 includes net aftertax gain approximately 620 million related sale combined statement income includes group product sales noc approximately 5 billion 21 billion 20 billion 1996 first quarter 1995 1994 respectively effective may 1995 caltex australia limited cal subsidiary group combined petroleum refining marketing operations ampol limited form australian petroleum pty limited appl owns manages combined refining marketing operations cal contributed net assets carrying value 419 million 50 equity interest appl gain loss recognized carrying value cals investment appl excess proportionate share appls net equity amortized approximately 20 years remaining interest star petroleum refining company ltd sprc owned thailand governmental entity provisions sprc shareholders agreement limit groups control mandate reduction ownership minority position year 2000 shown summarized financial information affiliates millions dollars 100 equity share 1996 1995 1996 1995 current assets 6128 7125 3075 3556 assets 7303 10415 3836 5368 current liabilities 5191 5608 2618 2804 liabilities 4768 5865 2533 3039 net worth 3472 6067 1760 3081 100 equity share 1996 1995 1994 1996 1995 1994 operating revenues 15436 15396 10886 7751 7674 5418 operating income 749 955 770 364 472 381 net income 133 859 526 51 425 263 cash dividends received affiliates 89 million 76 million 43 million 1996 1995 1994 respectively 1995 affiliate sold certain property required local government groups share approximately 171 million resulting gain included groups 1995 net income retained earnings december 31 1996 1995 includes 10 billion 17 billion respectively representing groups share undistributed earnings affiliates equity c13 caltex group companies notes combined financial statements note 5 shortterm debt shortterm debt consists primarily demand promissory notes acceptance credits overdrafts current portion longterm debt weighted average interest rates shortterm financing december 31 1996 1995 75 70 respectively unutilized lines credit available shortterm financing totaled 727 million december 31 1996 note 6 longterm debt longterm debt related interest rates 1996 1995 follows december 31 millions dollars 1996 1995 us dollar debt variable interest rate term loans 294 243 fixed interest rate term loans 625 67 average rates 110 58 australian dollar debt variable interest rate term loan 50 promissory notes payable 673 76 average rate 20 19 fixed interest rate loans 112 rate due 20012002 224 230 new zealand dollar debt variable interest rate term loans 46 13 fixed interest rate loan 809 rate due 2000 7 12 15 713 628 december 31 1996 1995 20 million 19 million respectively shortterm debt classified longterm debt settlement obligations expected require use working capital 1997 group intent ability refinance debt longterm basis borrowings fully covered longterm committed credit facilities major banks aggregate maturities longterm debt next five years follows millions dollars 1997 23 included shortterm debt 1998 52 1999 110 2000 105 2001 151 2002 thereafter 295 note 7 operating leases group operating leases involving various marketing assets net rental expense 92 million 91 million 121 million 1996 1995 1994 respectively future net minimum rental commitments operating leases non cancelable terms excess one year follows millions dollars 1997 35 1998 35 1999 35 2000 37 2001 38 2002 thereafter 73 c14 caltex group companies notes combined financial statements note 8 employee benefit plans group various retirement plans generally plans provide defined benefits based final average pay benefit levels vesting terms funding practices vary among plans funded status retirement plans primarily foreign inclusive affiliates equity follows december 31 millions dollars assets exceed accumulated benefits funding status benefits exceed assets 1996 1995 1996 1995 actuarial present value vested benefit obligation 203 186 88 215 accumulated benefit obligation 224 208 113 251 projected benefit obligation 387 362 136 308 amount assets available benefits funded assets fair value 348 341 51 123 net pension asset liability recorded 3 23 67 146 total assets 345 318 118 269 assets less projected benefit obligation 42 44 18 39 consisting unrecognized transition net assets liabilities 13 9 5 unrecognized net losses 26 38 6 30 unrecognized prior service costs 16 19 3 4 weighted average rate assumptions discount rate 109 105 56 51 rate increase compensation 86 82 33 31 expected return plan assets 110 101 45 year ended december 31 millions dollars components pension expense 1996 1995 1994 cost benefits earned year 26 32 27 interest cost projected benefit obligation 46 55 actual return plan assets 40 47 23 net amortization deferral 10 12 16 total 42 52 43 c15 caltex group companies notes combined financial statements note 9 commitments contingencies january 25 1990 caltex petroleum corporation certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer lawsuit filed houston texas state court removal federal district court houston litigations disposition turned questions federal court jurisdiction whether case dismissed forum non conveniens plaintiffs petition purported class action behalf least 3350 parties either survivors next kin persons deceased collision philippine waters december 20 1987 one vessel involved collision carrying group products connection freight contract although group direct indirect ownership operational responsibility either vessel various theories liability alleged group specific monetary recovery sought although petition contained variety demands various categories compensatory well punitive damages consequently reasonable estimate damages involved sought made federal district court march 1992 dismissed case forum non conveniens subsequent dismissal consistent terms cases filed group entities philippine courts previously filed subsequent collision various stages litigation vigorously resisted plaintiffs also filed another lawsuit alleging causes action texas litigation louisiana state court new orleans group removed case federal district court new orleans remanded back louisiana state court group sought injunctive relief federal district court houston order ensure courts previous dismissal would given proper effect request relief denied group filed expedited appeal u fifth circuit court appeals case argued fifth circuit october 1994 court january 1996 affirmed federal district courts refusal enjoin plaintiffs proceeding louisiana lawsuit group sought obtained en banc reconsideration case entire fifth circuit court appeals en banc court issued opinion evenly divided 88 merits groups position opinion served uphold district courts refusal grant group relief sought group filing petition writ certiorari us supreme court groups management intends continue contest case companion litigation philippines vigorously various procedural substantive grounds group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third parties group also involved certain litigation us internal revenue service tax audits claims made substantial amounts may require cash deposits claims resolved groups opinion impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position liquidity april 1994 group subsidiary entered contractual commitment effective october 1996 period eleven years purchase petroleum products conjunction financing refinery owned affiliate commenced operation 1996 total future estimated commitments billions dollars group similar contracts based current pricing projected growth rates 1997 11 1998 11 1999 12 2000 12 2001 12 2002 expiration contracts 64 purchases billions dollars similar contracts 08 05 1996 1995 1994 respectively c16 caltex group companies notes combined financial statements note 9 commitments contingencies continued group contingently liable sponsor support funding construction completion maximum 192 million postcompletion loan repayments maximum 304 million connection affiliates project finance obligations project operational construction completion defined includes achieving extended continuous operation satisfying certain financial conditions met middle 1997 earliest postcompletion support declines progressively related longterm loans repaid final payment due 2010 december 31 1996 calls made lenders either type sponsor support however group provided shortterm extended trade credit commercial terms related crude supply approximately 61 million affiliate december 31 1996 group expect required sponsor support material impact combined financial position group commitments 5 million 12 million december 31 1996 1995 respectively form letters credit issued behalf group companies facilitate either groups parties ability trade normal course business note 10 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk groups outstanding commitments interest rate swaps foreign currency contractual amounts december 31 millions dollars 1996 1995 interest rate swaps pay fixed receive floating 460 485 interest rate swaps pay floating receive fixed 265 230 commitments purchase foreign currencies 417 439 commitments sell foreign currencies 11 2001 group enters interest rate swaps managing interest rate risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities nine years unrealized gains losses contracts outstanding yearend 1996 1995 material group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments contracts purchase foreign currencies principally australian singapore dollars hedging existing liabilities maturities six years december 31 1995 contracts sell foreign currencies primarily reflected hedge agreed proceeds yen 200 billion approximately 2 billion relating april 1 1996 sale groups interest nprc estimated realized gain hedge included sales proceeds received april 1 1996 approximately 121 million unrealized gains losses applicable outstanding forward exchange contracts december 31 1996 1995 material groups activities commoditybased derivative contracts must settled cash material unrealized gains losses commodity based derivative contracts outstanding december 1996 1995 material c17 caltex group companies notes combined financial statements note 10 financial instruments continued groups longterm debt 713 million 628 million december 31 1996 1995 respectively fair values 756 million 639 million december 31 1996 1995 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents notes accounts receivable current liabilities approximate fair value short maturities group investments debt securities availableforsale amortized costs 70 million 65 million december 31 1996 1995 respectively investments debt securities held maturity amortized costs 7 million 14 million december 31 1996 1995 respectively fair value securities december 31 1996 1995 approximates amortized costs december 31 1996 1995 investments debt securities availableforsale maturities less ten years investments debt securities held maturity maturities less one year december 31 1996 1995 groups carrying amount investments affiliates accounted equity included 25 million 65 million respectively tax unrealized net gains investments held companies group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentration risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer considered sufficient credit losses historically within managements expectations note 11 taxes charged income consist following year ended december 31 millions dollars 1996 1995 1994 taxes income taxes international duties import excise taxes 1349 1660 2384 18 29 32 total taxes income taxes 1367 1689 2416 income taxes us taxes current 455 24 23 deferred 19 23 3 total us 474 1 20 international taxes current 491 425 444 deferred 17 41 42 total international 508 466 402 total provision income taxes 982 467 422 c18 caltex group companies notes combined financial statements note 11 taxes continued income taxes computed individual company basis rates effect various countries operation effective tax rate differs expected tax rate us federal corporate tax rate follows year ended december 31 1996 1995 1994 computed expected tax rate 350 effect recording equity net income affiliates tax basis 07 109 83 effect dividends received subsidiaries affiliates 05 29 44 income subject foreign taxes excess us statutory tax rate 81 83 69 effect sale investment affiliate 36 03 11 effective tax rate 452 342 380 deferred income taxes provided tax jurisdiction temporary differences financial reporting tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax liabilities assets follows december 31 millions dollars 1996 1995 depreciation 337 306 miscellaneous 28 56 deferred tax liabilities 365 362 investment allowances 73 62 retirement benefits 28 29 tax loss carryforwards 10 24 miscellaneous 25 47 deferred tax assets 136 162 valuation allowance 10 17 net deferred taxes 239 217 c19 caltex group companies notes combined financial statements note 11 taxes continued deferred taxes classified combined balance sheet current assets 10 million noncurrent liabilities 249 million december 31 1996 current liabilities 8 million noncurrent liabilities 209 million december 31 1995 valuation allowance established adjust recorded deferred tax assets amounts recoverability likely net income increased 7 million 1996 decreased 1995 1994 8 million 3 million respectively changes deferred tax asset valuation allowance undistributed earnings subsidiaries affiliates us deferred income tax provision made approximated 30 billion december 31 1996 37 billion december 31 1995 earnings intended indefinitely reinvested become taxable us upon remittance dividends practical estimate amount tax may payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability note 12 combined statement cash flows purposes combined statement cash flows highly liquid debt instruments original maturities three months less considered cash equivalents changes operating working capital consist following year ended december 31 1996 1995 1994 accounts notes receivable 235 42 97 inventories 16 89 37 accounts payable 210 15 152 accrued liabilities 18 31 16 estimated income taxes 16 26 24 total 7 27 58 net cash provided operating activities includes following cash payments interest income taxes year ended december 31 1996 1995 1994 interest paid net capitalized interest 137 144 94 income taxes paid 865 466 444 1995 caltex australia limited exchanged noncash investing transaction petroleum refining marketing net assets 419 million investment australian petroleum pty limited affiliate group significant noncash investing financing transactions occurred either 1996 1994 net cash provided operating activities 1996 includes income tax payments relating sale investment affiliate proceeds sale included net cash provided investing activities c20 caltex group companies notes combined financial statements note 13 1996 caltex trading transport corporation subsidiary group entered agreement partner government state bahrain ceding groups throughput rights bahrain refining joint venture bapco exchange recovery costs subsequent year end memorandum understanding signed whereby groups 40 interest bapco related assets sold government effective april 1 1997 approximately net book value negotiations still progress group believes sale material impact groups combined financial position results operations note 14 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures affiliates equity accordingly disclosures presented herein c21item 14 principal accounting fees services information required item 9e schedule 14a contained heading “proposal ratify appointment independent registered public accounting firm” 2011 proxy statement incorporated reference annual report form 10k part iv item 15item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify pricewaterhousecoopers llp independent registered public accounting firm 2021” 2021 proxy statement incorporated reference annual report form 10k page intentionally left blank financial table contents managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page 37 discussion financial results major operating area three years ended december 31 2020 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia bangladesh brazil canada china egypt equatorial guinea indonesia israel kazakhstan kurdistan region iraq myanmar mexico nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south korea thailand united kingdom united states venezuela company’s objective deliver higher returns lower carbon superior shareholder value business environment earnings company depend mostly profitability upstream business segment significant factor affecting results operations upstream segment price crude oil determined global markets outside company’s control company’s downstream business crude oil largest cost component refined products periods sustained lower prices could result impairment writeoff specific assets future periods cause company adjust operating expenses including employee reductions capital exploratory expenditures along measures intended improve financial performance similarly impairments writeoffs occurred may occur future result managerial decisions progress certain projects company’s portfolio ongoing global interest addressing risks climate change support policies advancements lower carbon technologies expected seeking help advance lower carbon future chevron focused lowering carbon intensity cost efficiently increasing renewables offsets support business investing lowcarbon technologies enable commercial solutions response market conditions covid19 2020 travel restrictions constraints economic activity designed limit spread covid19 virus implemented many locations around world constraints reduced demand products commodity prices fell negatively impacting company’s 2020 financial operating results demand commodity prices shown signs recovery demand back prepandemic levels financial results likely continue challenged future quarters due rapidly managements discussion analysis financial condition results operations changing environment continues uncertainty unpredictability around extent covid19 pandemic impact future results could material chevron entered crisis well positioned strong balance sheet flexible capital program low cash flow breakeven price protect longterm health value company took swift action adjusting items control company lowered capital expenditures 35 percent lowered operating expense excluding nonrecurring severance costs 14 billion compared 2019 company completed enterprisewide transformation expected capture additional cost efficiencies additionally company suspended stock repurchase program march 2020 taken together actions consistent financial priorities protect dividend prioritize capital spend drives longterm value maintain strong balance sheet company expects continue sufficient liquidity access commercial paper debt capital markets due strong balance sheet investment grade credit ratings additionally company access nearly 10 billion committed credit facilities effective tax rate company change substantially periods significant earnings volatility due mix effects impacted absolute level earnings losses whether arise higher lower tax rate jurisdictions result decline increase effective income tax rate one period may indicative expected results future periods note 15 provides company’s effective income tax rate last three years refer “cautionary statements relevant forwardlooking information” page 2 “risk factors” part item 1a pages 18 23 discussion inherent risks could materially impact company’s results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance value growth asset dispositions restructurings may result significant gains losses future periods company’s asset sale program 2018 2020 targeted beforetax proceeds 510 billion three year period ending december 31 2020 assets sales proceeds totaled 77 billion middle guidance range company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry production inventory levels technology advancements production quotas actions imposed organization petroleum exporting countries opec producers actions regulators weatherrelated damage disruptions competing fuel prices natural human causes beyond company’s control covid19 pandemic regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax applicable laws regulations company actively managing schedule work contracting procurement supply chain activities effectively manage costs ensure supply chain resiliency continuity support operational goals third party costs capital exploration operating expenses subject external factors beyond company’s control including limited general level inflation tariffs taxes imposed goods services market based prices charged industry’s material service providers chevron utilizes contracts various pricing mechanisms may lag company’s costs reflect changes market trends spot markets current cost indexes many materials services stabilized crude oil natural gas prices demand rebounded lows early pandemic though demand still returned prepandemic levels drilling activity us risen slowly steadily end year timing managements discussion analysis financial condition results operations trajectory increase cost materials services going forward depend extent oil gas industry recovery correlated initial signs industry recovery cost stabilization noticeable improvement risk default key suppliers date material impacts operations due supplier defaults chevron actively monitoring engaging key suppliers mitigate potential business impacts capital exploratory expenditures operating expenses could also affected damage production facilities caused severe weather civil unrest delays construction factors chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 42 per barrel fullyear 2020 compared 64 2019 midfebruary 2021 brent price 64 per barrel wti price averaged 39 per barrel fullyear 2020 compared 57 2019 midfebruary 2021 wti price 60 per barrel majority company’s equity crude production priced based brent benchmark crude prices sharply declined end first second quarter 2020 due surplus supply demand decreased following governmentimposed travel restrictions constraints economic activity second half 2020 supplydemand balance slowly improved primarily due production cuts demand growth allowing prices somewhat recover company’s average realization us crude oil natural gas liquids 2020 31 per barrel 37 percent 2019 company’s average realization international crude oil natural gas liquids 2020 36 per barrel 38 percent 2019 prices natural gas closely aligned seasonal supplyanddemand infrastructure conditions local markets united states prices henry hub averaged 198 per thousand cubic feet mcf 2020 compared 253 per mcf 2019 midfebruary 2021 henry hub spot price increased 600 per mcf amid freezing temperatures across much united states outside united states prices natural gas depend wide range supply demand regulatory circumstances company’s longterm contract prices liquefied natural gas lng typically linked crude oil prices equity lng offtake operated australian lng projects committed binding longterm contracts remainder sold asian spot lng market international natural gas realizations averaged 459 per mcf 2020 compared 583 per mcf 2019 see page 41 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2020 averaged 3083 million barrels per day 14 percent company’s net oilequivalent production 2020 occurred opecmember countries angola equatorial guinea nigeria partitioned zone saudi arabia kuwait republic congo venezuela company estimates net oilequivalent production 2021 grow 3 percent compared 2020 assuming brent crude oil price 50 per barrel excluding impact anticipated 2021 asset sales estimate subject many factors uncertainties including quotas actions may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction reservoir performance greaterthanexpected declines production mature fields startup rampup projects fluctuations demand crude oil natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds storage constraints economic managements discussion analysis financial condition results operations conditions could lead shutin production disruptions operations outlook future production levels also affected size number economic investment opportunities time lag initial exploration beginning production company increased investment emphasis shortcycle projects pressure current market environment partitioned zone saudi arabia kuwait production shutin beginning may 2015 december 2019 governments saudi arabia kuwait signed memorandum understanding allow production restart partitioned zone midfebruary 2020 prestartup activities commenced production resumed july 2020 financial effects loss production 2019 first half 2020 significant fourth quarter 2020 oil equivalent production partitioned zone averaged 40 thousand barrels per day chevron interests venezuelan crude oil assets including operated petropiar petroboscan petroindependiente operating environment venezuela deteriorating time petropiar petroboscan petroindependiente conducted activities consistent authorization provided pursuant general licenses issued united states government second quarter 2020 company completed evaluation carrying value venezuelan investments line accounting policies concluded given current operating environment overall outlook created significant uncertainties regarding recovery company’s investment temporary loss value occurred resulted full impairment investment country totaling 26 billion change accounting treatment equity method nonequity method accounting result company also removed approximately 160 million barrels proved reserves stopped reporting production country effective july 2020 company remains committed people assets operations venezuela net proved reserves consolidated companies affiliated companies totaled 111 billion barrels oilequivalent yearend 2020 decrease 3 percent yearend 2019 reserve replacement ratio 2020 74 percent 5 10 year reserve replacement ratios 99 percent 106 percent respectively refer table v beginning page 103 tabulation company’s proved net oil gas reserves geographic area beginning 2018 yearend 2018 2020 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2020 response market conditions covid19 upstream travel restrictions constraints global economic activity 2020 response covid19 caused significant decrease demand oil gas led lower price realizations across commodities critical asset integrity reliability activities progressed throughout year managements discussion analysis financial condition results operations locations high covid19 infection rates deferred nonessential work demobilized nonessential personnel reduce covid19 exposure risk workforce despite challenges posed pandemic progress continues fgpwpmp project tengiz second quarter project construction workforce demobilized 20 percent planned levels slowed overall construction pace third quarter rate infections kazakhstan slowed allowing remobilization fgpwpmp construction workforce begin fourth quarter staffing levels fgpwpmp returned 95 percent desired fourth quarter remobilization levels however worldwide resurgence infections prevented remaining 5 percent workforce returning work slowed progress project extended rotations covid testing isolation protocols place minimize spread virus given uncertain timeline remobilizing personnel safely sustaining activity levels early provide meaningful information regarding impacts project cost schedule facility maintenance turnarounds adjusted certain cases deferred 2021 cases turnarounds extended duration andor reduced scope response pandemic result reduction capital expenditures new production expected lower near term drilling completion activities scaled back notably permian basin gulf mexico argentina exploration activities projects yet execution phase deferred may impact production future years production levels curtailed 2020 largely reductions imposed opec nations kazakhstan nigeria angola fourth quarter opec curtailments eased slightly relative third quarter production also curtailed due market conditions notably thailand additionally operators assets company nonoperated interests also curtailed production curtailments approximately 106 thousand barrels oil equivalent per day recorded 2020 first quarter 2021 expect curtailments approximately 40 thousand barrels oil equivalent per day predominately related opec restrictions decreased capital expenditures lower activity levels delays future development timing lower commodity prices resulted reductions chevron’s proved reserve quantities 2020 information reserves refer table v beginning page 103 countries face resurgence virus regulatory incountry conditions could impact logistics material movement pose risk business continuity taking precautionary measures reduce risk exposure spread covid19 virus screening testing appropriate quarantining workforce visitors upon arrival operated facilities refer “results operations” section pages 37 38 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets changes tax laws regulations company’s significant marketing areas west coast gulf coast united states asia chevron operates significant ownership interests refineries areas response market conditions covid19 downstream beginning march 2020 continuing first quarter 2021 demand refined products primarily jet fuel motor gasoline prior year levels result travel restrictions constraints economic activity implemented many countries combat spread covid19 virus product prices also fell sharply although economic activity somewhat rebounded lows experienced april refining margins continued near historic lows due lower demand pressure managements discussion analysis financial condition results operations global oil product surplus chevron continued take steps maximize diesel production given decline jet fuel motor gasoline demand fuel transportation keeps global supply chains moving company actively monitoring supply demand dynamics every region experiencing different recovery trends company adjusting schedule planned maintenance activity across refining network idling certain processing units adjust lower demand reduce costs manage inventories importantly protect safety employees contractors midfebruary 2021 chevron’s refining crude utilization approximately 80 85 percent sales yearoveryear approximately 50 percent jet fuel approximately 5 percent motor gasoline diesel sales relatively flat unclear long conditions persist company continue take actions necessary protect health wellbeing people environment operations conditions evolve refer “results operations” section page 38 additional discussion company’s downstream operations consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies operating developments key operating developments events 2020 early 2021 included following upstream azerbaijan completed sale companys interest azerichiraggunashli fields bakutbilisiceyhan pipeline colombia completed sale companys interest offshore chuchupa onshore ballena natural gas fields philippines completed sale companys interest malampaya field march united states completed acquisition noble energy inc united states completed sale appalachia natural gas business downstream australia completed acquisition puma energy australia holdings pty ltd united states chevron’s joint venture calbiogas llc successfully achieved first renewable natural gas production dairy farms california marketed alternative fuel heavyduty trucks buses united states announced formation joint venture brightmark llc produce market renewable natural gas united states announced investment zap energy inc startup company developing nextgeneration modular nuclear reactor united states announced investment blue planet systems corporation startup manufactures develops carbonate aggregates carbon capture technology intended reduce carbon intensity industrial operations united states announced agreement algonquin power utilities corp seeking codevelop renewable power projects provide electricity strategic assets across chevron’s global portfolio fouryear agreement chevron plans generate 500 megawatts energy demand renewable sources united states announced nonbinding offer february 2021 acquire outstanding common units noble midstream partners lp already owned chevron common stock dividends 2020 annual dividend 516 per share making 2020 33rd consecutive year company increased annual per share dividend payout january 2021 company’s board directors declared quarterly dividend 129 per share common stock repurchase program company purchased 175 billion common stock 2020 stock repurchase programs stock repurchase program suspended march 2020 managements discussion analysis financial condition results operations results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 12 beginning page 74 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages 31 36 refer “selected operating data” table page 41 threeyear comparison production volumes refined product sales volumes refinery inputs discussion variances 2019 2018 found “results operations” section pages 33 34 company’s 2019 annual report form 10k filed sec february 22 2020 us upstream us upstream reported loss 161 billion 2020 compared loss 509 billion 2019 smaller loss largely due absence fourth quarter 2019 impairment charges 817 billion primarily associated appalachia shale big foot partially offset lower crude oil realizations 336 billion second quarter 2020 impairments writeoffs 120 billion company’s average realization us crude oil natural gas liquids 2020 3053 per barrel compared 4854 2019 average natural gas realization 098 per thousand cubic feet 2020 compared 109 2019 net oilequivalent production 2020 averaged 106 million barrels per day 14 percent 2019 production increases shale tight properties permian basin 58000 barrels per day production noble acquisition partially offset normal field declines net liquids component oilequivalent production 2020 averaged 790000 barrels per day 9 percent 2019 net natural gas production averaged 161 billion cubic feet per day 2020 31 percent 2019 international upstream international upstream reported loss 825 million 2020 compared earnings 767 billion 2019 decrease primarily due lower crude oil natural gas realizations 46 billion 12 billion respectively managements discussion analysis financial condition results operations higher charges 14 billion impairments writeoffs charges 36 billion 2020 compared 22 billion 2019 lower crude oil sales volumes 11 billion lower gains asset sales 730 million also contributed decrease largely offset lower operating expenses 710 million foreign currency effects favorable impact earnings 38 million periods company’s average realization international crude oil natural gas liquids 2020 3607 per barrel compared 5814 2019 average natural gas realization 459 per thousand cubic feet 2020 compared 583 2019 international net oilequivalent production 203 million barrels per day 2020 5 percent 2019 decrease due production curtailments associated opec restrictions market conditions asset sale related decreases 94000 barrels per day partially offset higher production entitlement effects volumes associated noble acquisition net liquids component international oilequivalent production 108 million barrels per day 2020 6 percent 2019 international net natural gas production 568 billion cubic feet per day 2020 decreased 4 percent 2019 us downstream us downstream reported loss 571 million 2020 compared earnings 156 billion 2019 decrease primarily due lower margins refined product sales 108 billion lower sales volumes 100 billion lower equity earnings 50 percentowned cpchem 220 million also contributed decrease partially offset lower operating expenses 220 million total refined product sales 100 million barrels per day 2020 20 percent 2019 mainly due lower jet fuel gasoline diesel demand associated covid19 pandemic international downstream international downstream earned 618 million 2020 compared 922 million 2019 decrease earnings largely due lower margins refined product sales 160 million primarily resulting unfavorable inventory effects unfavorable tax items 110 million also contributed decrease partially offsetting decrease earnings lower operating expenses 130 million foreign currency effects unfavorable impact earnings 169 million periods total refined product sales 122 million barrels per day 2020 8 percent 2019 mainly due lower jet fuel demand associated covid19 pandemic consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2020 increased 102 billion 2019 change periods mainly due absence second quarter 2019 anadarko merger termination fee higher pension expenses severance noble acquisition costs partially offset absence prior year tax charge favorable tax items foreign currency effects increased net charges 210 million periods managements discussion analysis financial condition results operations consolidated statement income comparative amounts certain income statement categories shown discussion variances 2019 2018 found “consolidated statement income” section pages 34 36 company’s 2019 annual report form 10k sales operating revenues decreased 2020 mainly due lower refined product crude oil natural gas prices lower refined product volumes income equity affiliates decreased 2020 mainly due full impairment petropiar petroboscan venezuela lower upstreamrelated earnings tengizchevroil kazakhstan refer note 13 beginning page 77 discussion chevron’s investments affiliated companies income decreased 2020 mainly due absence receipt 2019 anadarko merger termination fee lower gains asset sales unfavorable swings foreign currency effects crude oil product purchases decreased 296 billion 2020 primarily due lower crude oil refined product prices lower refined product crude oil volumes operating selling general administrative expenses decreased 10 billion 2020 decrease primarily due lower services fees expenses nonoperated upstream properties materials supplies expense lower transportation expense partially offset higher severance costs exploration expenses 2020 increased primarily due higher charges well writeoffs depreciation depletion amortization expenses decreased 2020 primarily due lower impairments taxes income increased 2020 primarily due higher regulatory expenses property taxes partially offset lower taxes production payroll tax sales use tax interest debt expenses decreased 2020 mainly due lower interest rates partially offset higher debt balances components net periodic benefit costs increased 2020 primarily due higher pension settlement costs managements discussion analysis financial condition results operations decrease income tax expense 2020 458 billion due decrease total income tax company 1299 billion decrease income taxes company primarily result lower crude oil prices partially offset lower impairments project write charges us income tax decreased loss 548 billion 2019 loss 570 billion 2020 decrease earnings tax primarily driven effect lower crude oil prices us absence anadarko merger fee partially offset lower impairment charges higher production us tax benefit increased 117 billion 2019 158 billion 2020 primarily due increase beforetax loss international income tax decreased 1102 billion 2019 loss 175 billion 2020 decrease primarily driven effect lower crude oil natural gas prices lower production higher impairments charges lower beforetax income primarily drove 417 billion decrease international income tax expense charge 386 billion 2019 benefit 308 million 2020 refer also discussion effective income tax rate note 15 beginning page 79 managements discussion analysis financial condition results operations selected operating data12 managements discussion analysis financial condition results operations liquidity capital resources sources uses cash strength company’s balance sheet enabled fund timing differences throughout year cash inflows outflows cash equivalents marketable securities time deposits total balances 56 billion 57 billion december 31 2020 2019 respectively cash provided operating activities 2020 106 billion compared 273 billion 2019 primarily due lower crude oil prices cash provided operating activities net contributions employee pension plans approximately 12 billion 2020 14 billion 2019 cash provided investing activities included proceeds deposits related asset sales 29 billion 2020 28 billion 2019 restricted cash 11 billion 12 billion december 31 2020 2019 respectively held cash shortterm marketable securities recorded “deferred charges assets” “prepaid expenses current assets” consolidated balance sheet amounts generally associated upstream decommissioning activities tax payments funds held escrow taxdeferred exchanges refundable deposits related pending asset sales dividends paid common stockholders 97 billion 2020 90 billion 2019 debt finance lease liabilities total debt finance lease liabilities 443 billion december 31 2020 270 billion yearend 2019 173 billion increase total debt finance lease liabilities 2020 primarily due companys issuance longterm public bonds 80 billion may 2020 40 billion august 2020 assumption debt fair value 94 billion part transaction acquire noble october 2020 january 2021 chevron usa inc cusa issued bonds guaranteed chevron corporation exchange noble debt information bond issuances included note 18 page 84 amounts partially offset repayment longterm notes matured 2020 company’s debt finance lease liabilities due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 114 billion december 31 2020 compared 130 billion yearend 2019 amounts 9825 billion 975 billion reclassified longterm debt end 2020 2019 respectively yearend 2020 settlement obligations expected require use working capital 2021 company intent ability evidenced committed credit facilities refinance longterm basis company automatic shelf registration statement expires august 2023 unspecified amount nonconvertible debt securities issued chevron corporation cusa managements discussion analysis financial condition results operations major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation cusa noble texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa2 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations cash may generated asset dispositions capital program lending commitments affiliates shareholder distributions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company flexibility modify capital spending plans discontinue curtail stock repurchase program provide flexibility continue paying common stock dividend also remain committed retaining company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 17 shortterm debt page 83 summarized financial information guarantee securities subsidiaries august 2020 longterm public bonds issued cusa fully unconditionally guaranteed unsecured basis chevron corporation together “obligor group” march 2020 us securities exchange commission sec issued final rule amended disclosure requirements respect certain guaranteed securities registered rule 310 regulation sx adopted new rule 1301 regulation sx amendments effective january 4 2021 accordingly disclosed tables summary financial information presented chevron corporation guarantor excluding consolidated subsidiaries cusa issuer excluding consolidated subsidiaries summary financial information obligor group presented combined basis transactions combined entities eliminated financial information nonguarantor entities excluded common stock repurchase program february 1 2019 company announced board directors authorized new stock repurchase program maximum dollar limit 25 billion set term limits december 31 2020 company purchased total 486 million shares 55 billion resulting 195 billion remaining program authorized february 2019 march 24 2020 company announced suspension stock repurchase program response depressed market conditions following global outbreak covid19 pandemic shares purchased program announcement repurchases may made time open market block purchases privately negotiated transactions manner determined company timing repurchases actual amount repurchased depend variety factors including market price company’s shares general market economic managements discussion analysis financial condition results operations conditions factors stock repurchase program obligate company acquire particular amount common stock may suspended discontinued time capital exploratory expenditures capital exploratory expenditures business segment 2020 2019 2018 follows total reported expenditures 2020 135 billion including 40 billion company’s share equityaffiliate expenditures require cash outlays company acquisition noble included company’s capital exploratory expenditures information noble acquisition see page 96 note 29 2019 expenditures 210 billion including company’s share affiliates’ expenditures 61 billion 135 billion expenditures 2020 81 percent 109 billion related upstream activities approximately 85 percent expended upstream operations 2019 international upstream accounted 53 percent worldwide upstream investment 2020 54 percent 2019 company estimates 2021 organic capital exploratory expenditures 14 billion including 42 billion spending affiliates line 2020 expenditures reflects robust portfolio upstream downstream investments highlighted fgpwpmp project tengiz field kazakhstan company’s permian basin position upstream business approximately 65 billion allocated currently producing assets including 20 billion permian unconventional development approximately 35 billion upstream program planned major capital projects underway 75 percent associated fgpwpmp tengiz field kazakhstan additionally 15 billion allocated exploration early stage development projects midstream activities company monitors crude oil market conditions able adjust future capital outlays oil price conditions deteriorate worldwide downstream spending 2021 estimated 21 billion 12 billion estimated projects united states investments technology businesses corporate operations 2021 budgeted 04 billion noncontrolling interests company noncontrolling interests 10 billion december 31 2020 10 billion december 31 2019 distributions noncontrolling interests totaled 24 million 18 million 2020 2019 respectively included within noncontrolling interests 2020 120 million redeemable noncontrolling interest associated noble midstream pension obligations information related pension plan contributions included beginning page 87 note 21 employee benefit plans heading “cash contributions benefit payments” managements discussion analysis financial condition results operations financial ratios metrics following represent several metrics company believes useful measures monitor financial health company performance time current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2020 book value inventory lower replacement costs based average acquisition costs year approximately 27 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2020 lower 2019 due lower income free cash flow cash provided operating activities less cash capital expenditures represents cash available creditors investors investing business debt ratio total debt percentage total debt plus chevron corporation stockholders’ equity indicates company’s leverage company’s debt ratio 252 percent yearend 2020 compared 158 percent yearend 2019 managements discussion analysis financial condition results operations net debt ratio total debt less cash equivalents time deposits marketable securities percentage total debt less cash equivalents time deposits marketable securities plus chevron corporation stockholders’ equity indicates company’s leverage net cash balances capital employed sum chevron corporation stockholders’ equity total debt noncontrolling interests represents net investment business return average capital employed roce net income attributable chevron adjusted aftertax interest expense noncontrolling interest divided average capital employed average capital employed computed averaging sum capital employed beginning end year roce ratio intended measure annual earnings percentage historical investments business return stockholders’ equity rose net income attributable chevron divided average chevron corporation stockholders’ equity average stockholder’s equity computed averaging sum stockholder’s equity beginning end year rose ratio intended measure earnings percentage shareholder investments managements discussion analysis financial condition results operations offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements information related matters included page 92 note 22 contingencies commitments following table summarizes company’s significant contractual obligations 1excludes contributions pensions postretirement benefit plans aro information employee benefit plans contained note 21 beginning page 87 information aros contained note 23 beginning page 94 2does include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 39825 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20222023 period amounts represent principal balance 4excludes finance lease liabilities 5does include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices direct guarantees additional information related guarantees included page 92 note 22 contingencies commitments indemnifications information related indemnifications included page 92 note 22 contingencies commitments financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids liquefied natural gas feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2020 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies company’s risk management practices compliance policies reviewed audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2020 material company’s results operations managements discussion analysis financial condition results operations company uses monte carlo simulation method valueatrisk var model estimate maximum potential loss fair value 95 percent confidence level oneday holding period effect adverse changes market conditions derivative commodity instruments held issued based inputs var company’s primary risk exposures area derivative commodity instruments december 31 2020 2019 material company’s cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income material open foreign currency derivative contracts december 31 2020 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2020 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” page 77 note 13 investments advances discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page 78 note 14 heading “mtbe” ecuador information related ecuador matters included note 14 heading “ecuador” beginning page 78 environmental following table displays annual changes company’s beforetax environmental remediation reserves including us federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 136 billion asset retirement obligations yearend 2020 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise decommission facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron company’s 2020 environmental expenditures refer note 22 page 93 additional discussion environmental remediation provisions yearend reserves refer also note 23 page 94 additional discussion company’s asset retirement obligations suspended wells information related suspended wells included note 19 accounting suspended exploratory wells beginning page 85 income taxes information related income tax contingencies included pages 79 82 note 15 page 92 note 22 heading “income taxes” managements discussion analysis financial condition results operations contingencies information related contingencies included page 93 note 22 consolidated financial statements heading “other contingencies” environmental matters company subject various international federal state local environmental health safety laws regulations marketbased programs laws regulations programs continue evolve expected increase number complexity time govern manner company conducts operations also products sells example international agreements national regional state legislation regulatory measures aim limit reduce greenhouse gas ghg emissions currently various stages implementation consideration ghg issues responses issues international agreements national regional state legislation regulations integrated company’s strategy planning capital investment reviews risk management tools processes applicable also factored company’s longrange supply demand energy price forecasts reflect longrange effects renewable fuel penetration energy efficiency standards climaterelated policy actions demand response oil natural gas prices addition legislation regulations intended address hydraulic fracturing also continue evolve national state local levels refer “risk factors” part item 1a pages 18 23 discussion inherent risks increasingly restrictive environmental regulation could materially impact company’s results operations financial condition costs complying existing laws regulations pertaining company operations products embedded normal costs business however possible predict certainty amount additional investments new existing technology facilities amounts increased operating costs incurred future prevent control reduce eliminate releases hazardous materials pollutants environment remediate restore areas damaged prior releases hazardous materials comply new environmental laws regulations although costs may significant results operations single period company presently expect material adverse effect company’s liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2020 approximately 20 billion consolidated companies included expenditures approximately 05 billion environmental capital expenditures 15 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites decommissioning restoration sites 2021 total worldwide environmental capital expenditures estimated 05 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application accounting principles generally accepted united states america gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein managements discussion analysis financial condition results operations 1the nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2the impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevron’s estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevron’s consolidated financial statements using successful efforts method accounting include following 1amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2020 chevron’s uop depreciation depletion amortization dda oil gas properties 130 billion proved developed reserves beginning 2020 64 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2020 would increased approximately 700 million 2impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page 103 changes proved reserve estimates three years ended december 31 2020 table vii “changes standardized measure discounted future net cash flows proved reserves” page 111 estimates proved reserve values three years ended december 31 2020 oil gas reserves commentary read conjunction properties plant equipment section note 1 beginning page 64 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions generally consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 16 page 82 section properties plant equipment note 1 “summary significant accounting policies” beginning page 64 managements discussion analysis financial condition results operations company performs impairment assessments triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision company’s crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets addition impairments could occur due changes national state local environmental regulations laws including designed stop impede development production oil gas also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value occurs determination must made whether loss otherthantemporary case investment impaired number differing assumptions potentially affecting whether investment impaired period amount impairment sensitivity analysis practicable 2020 company recorded impairments writeoffs certain oil gas properties primarily due downward revisions oil gas price outlook addition company fully impaired investments petropiar petroboscan completing evaluation carrying value venezuelan investments line accounting policies concluding given current operating environment overall outlook create significant uncertainties regarding recovery company’s investment temporary loss value occurred 2019 company recorded impairments writeoffs certain oil gas properties following review approval business plan capital expenditure program result company’s disciplined approach capital allocation downward revision longerterm commodity price outlook company reduced funding various natural gasrelated upstream opportunities including appalachia shale kitimat lng international projects addition revised longterm oil price outlook resulted impairment big foot sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired resulted larger impacts impaired assets asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2020 practicable given broad range company’s longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 23 page 94 additional discussions asset retirement obligations pension postretirement benefit plans note 21 beginning page 87 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page 89 note 21 relevant headings actual rates may vary significantly estimates unanticipated changes beyond company’s control managements discussion analysis financial condition results operations 2020 company used expected longterm rate return 65 percent discount rate service costs 33 percent discount rate interest cost 26 percent primary us pension plan actual return 2020 94 percent 10 years ended december 31 2020 actual asset returns averaged 79 percent plan additionally exception three years within 10year period actual asset returns plan equaled exceeded 65 percent year total pension expense 2020 15 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 67 percent companywide pension expense would reduced total pension plan expense 2020 approximately 88 million 1 percent increase discount rates plan would reduced pension expense 2020 approximately 269 million aggregate funded status recognized december 31 2020 net liability approximately 62 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2020 company used discount rate 24 percent measure obligations primary us pension plan indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 61 percent companywide pension obligation would reduced plan obligation approximately 475 million would decreased plan’s underfunded status approximately 32 billion 28 billion company’s opeb plans expense 2020 57 million total liability unfunded end 2020 27 billion primary us opeb plan company used discount rate service cost 34 percent discount rate interest cost 27 percent measure expense 2020 24 percent discount rate measure benefit obligations december 31 2020 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2020 opeb expense opeb liabilities end 2020 differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page 88 note 21 information 74 billion beforetax actuarial losses recorded company december 31 2020 addition information related company contributions included page 91 note 21 heading “cash contributions benefit payments” business combinations purchaseprice allocation accounting business combinations requires allocation company’s purchase price various assets liabilities acquired business respective fair values company uses available information make fair value determinations determining fair values assets acquired generally involves assumptions regarding amounts timing future revenues expenditures well discount rates additional discussion purchase price allocations refer note 29 beginning page 96 contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 22 beginning page 92 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2020 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss information refer “changes management’s estimates assumptions may material managements discussion analysis financial condition results operations impact company’s consolidated financial statements financial operational performance given period” “risk factors” part item 1a page 23 new accounting standards refer note 4 beginning page 69 information regarding new accounting standards quarterly results unaudited consolidated statement income millions dollars except pershare amounts consolidated statement comprehensive income millions dollars consolidated balance sheet millions dollars except pershare amounts consolidated statement cash flows millions dollars consolidated statement equity amounts millions dollars notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates circumstances change additional information becomes known subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variable interest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income consolidated statement equity included within noncontrolling interest redeemable noncontrolling interest fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 inputs quoted prices active markets identical assets liabilities level 2 inputs quoted prices included within level 1 directly indirectly observable asset liability level 3 inputs observable market derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories primarily stated cost net realizable value notes consolidated financial statements millions dollars except pershare amounts properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page 85 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net cash flows proved crude oil natural gas properties company performs impairment reviews country concession psc development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 7 beginning page 71 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 23 page 94 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced impairments capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize finance lease rightofuse assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized leases classified operating finance leases operating finance leases recognize lease liabilities associated rightofuse assets company elected shortterm lease exception therefore recognizes rightofuse assets lease liabilities leases term greater one year company elected practical expedient separate nonlease components lease components asset classes except certain asset classes significant nonlease ie service components leases used joint ventures company recognizes 100 percent rightofuse assets lease liabilities company sole signatory lease cases company operator joint venture lease costs reflect costs associated operator’s working interest share lease term includes committed lease term identified contract taking account renewal termination options management notes consolidated financial statements millions dollars except pershare amounts reasonably certain exercise company uses incremental borrowing rate proxy discount rate based term lease unless implicit rate available goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annually december 31 frequently event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 23 page 94 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition company accounts delivery order crude oil natural gas petroleum chemical products separate performance obligation revenue recognized performance obligation satisfied typically occurs point time control product transfers customer payment generally due within 30 days delivery company accounts delivery transportation fulfillment cost separate performance obligation recognizes costs operating expense period revenue related commodity recognized revenue measured amount company expects receive exchange transferring commodities customer company’s commodity sales typically based prevailing marketbased prices may include discounts allowances market prices become known terms company’s contracts transaction price included revenue based company’s estimate likely outcome discounts allowances estimated using combination historical recent data trends deliveries contain multiple products observable standalone selling price generally used measure revenue product company includes estimates transaction price extent significant reversal revenue probable subsequent periods stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement company’s longterm incentive plan ltip awards include stock options stock appreciation rights graded vesting provisions onethird award vests first second third anniversaries date grant addition performance shares granted company’s ltip vest end threeyear performance period awards granted company’s ltip beginning 2017 stock options stock appreciation rights graded vesting one third award vests annually january 31 first anniversary grant date standard restricted stock unit awards cliff vesting total award vest january 31 fifth anniversary grant date subject adjustment upon termination pursuant satisfaction certain criteria company amortizes awards straightline basis notes consolidated financial statements millions dollars except pershare amounts note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ended december 31 2020 reflected table 1 amounts net tax 2 refer note 21 beginning page 87 reclassified components totaling 1084 included employee benefit costs year ended december 31 2020 related income taxes period totaling 252 reflected income tax expense consolidated statement income reclassified amounts insignificant 3 stranded tax reclassification retained earnings per asu 201802 notes consolidated financial statements millions dollars except pershare amounts note 3 information relating consolidated statement cash flows “other” line operating activities section includes changes postretirement benefits obligations longterm liabilities consolidated statement cash flows excludes changes consolidated balance sheet affect cash distributions less income equity affiliates “depreciation depletion amortization” “deferred income tax provision” “dry hole expense” net decrease increase operating working capital collectively include approximately 48 billion noncash reductions 2020 relating impairments noncash charges “depreciation depletion amortization” “deferred income tax provision” “dry hole expense” collectively include approximately 93 billion noncash reductions recorded 2019 relating impairments noncash charges refer also note 23 page 94 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2020 notes consolidated financial statements millions dollars except pershare amounts refer also note 29 page 96 discussion allstock acquisition noble cash received result acquisition reflected consolidated statement cash flows “cash acquired noble energy inc” changes consolidated balance sheet resulting acquisition affect cash reflected consolidated statement cash flows major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash movements 816 2020 239 2019 25 2018 table quantifies beginning ending balances restricted cash restricted cash equivalents consolidated balance sheet note 4 new accounting standards financial instruments credit losses topic 326 effective january 1 2020 chevron adopted accounting standards update asu 201613 related amendments additional information company’s expected credit losses refer note 28 page 96 note 5 lease commitments company enters leasing arrangements lessee lessor arrangements significant operating lease arrangements mainly involve land bareboat charters terminals drill ships drilling rigs time chartered vessels office buildings warehouses exploration production equipment finance leases primarily include facilities vessels office buildings production equipment details rightofuse assets lease liabilities operating finance leases including balance sheet presentation follows notes consolidated financial statements millions dollars except pershare amounts 1 includes noncash additions 1353 164 2020 1201 184 2019 rightofuse assets obtained exchange new modified lease liabilities operating finance leases respectively 2020 includes 566 operating lease rightofuse assets 566 lease liabilities associated puma acquisition 2020 also includes 124 operating lease rightofuse assets 148 lease liabilities 112 finance lease rightofuse assets 309 lease liabilities associated noble acquisition total lease costs consist amounts recognized consolidated statement income period amounts capitalized part cost another asset total lease costs incurred operating finance leases follows 1 net rental expense 816 2018 2 includes variable shortterm lease costs cash paid amounts included measurement lease liabilities follows december 31 2020 estimated future undiscounted cash flows operating finance leases follows additionally company 907 future undiscounted cash flows operating leases yet commenced leases primarily drill ship drilling rigs leasing arrangements underlying asset yet constructed lessor primarily involved design construction asset notes consolidated financial statements millions dollars except pershare amounts note 6 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows note 7 fair value measurements tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2020 december 31 2019 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2020 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company reported impairments certain upstream properties 2020 primarily due downward revisions oil gas price outlook impact impairments included “depreciation depletion amortization” consolidated statement income company reported impairments certain upstream properties 2019 primarily due capital allocation decisions lower longterm commodity price outlook investments advances 2020 company fully impaired investments petropiar petroboscan venezuela impact impairments included “income loss equity affiliates” consolidated statement income company reported impairments certain upstream equity companies 2019 primarily due capital allocation decisions lower longterm commodity price outlook notes consolidated financial statements millions dollars except pershare amounts assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis yearend 2020 company assets measured fair value level 3 using unobservable inputs 2451 carrying value assets written fair value based estimates derived internal discounted cash flow models cash flows determined using estimates future production outlook future price based published prices discount rate believed consistent used principal market participants significant level 3 inputs attributed two assets one international location volumes price primarily based natural gas second us location volumes price primarily based crude assets liabilities required measured fair value company holds cash equivalents time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 5596 5686 december 31 2020 december 31 2019 respectively fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2020 “cash equivalents” include investments carryingfair value 1141 1225 december 31 2020 december 31 2019 respectively december 31 2020 investments classified level 1 include restricted funds related certain upstream decommissioning activities tax payments financing program reported “deferred charges assets” consolidated balance sheet longterm debt excluding finance lease liabilities 30805 13659 december 31 2020 december 31 2019 respectively estimated fair values 34390 14326 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 32123 classified level 1 fair value longterm debt 2267 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2020 2019 material note 8 financial derivative instruments derivative commodity instruments company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities notes consolidated financial statements millions dollars except pershare amounts company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2020 december 31 2019 december 31 2018 classification consolidated balance sheet consolidated statement income consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2020 december 31 2019 consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions “a right offset” concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers notes consolidated financial statements millions dollars except pershare amounts note 9 assets held sale december 31 2020 company classified 1101 net properties plant equipment “assets held sale” consolidated balance sheet assets associated upstream operations anticipated sold next 12 months revenues earnings contributions assets 2020 material note 10 equity retained earnings december 31 2020 2019 included 26532 25319 respectively company’s share undistributed earnings equity affiliates december 31 2020 67 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron longterm incentive plan addition 644376 shares remain available issuance 1600000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 11 earnings per share basic earnings per share eps based upon “net income loss attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 20 “stock options sharebased compensation” beginning page 86 table sets forth computation basic diluted eps note 12 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing transporting crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products lubricants transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology activities notes consolidated financial statements millions dollars except pershare amounts company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs allocated operating segments however operating segments billed direct use corporate services non billable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments receivables assets yearend 2020 2019 follows segment sales operating revenues operating segment sales operating revenues including internal transfers years 2020 2019 2018 presented table next page products transferred operating segments internal product values approximate market prices notes consolidated financial statements millions dollars except pershare amounts revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil “all other” activities include revenues insurance operations real estate activities technology companies 1 united states country accounted 10 percent company’s sales operating revenues segment income taxes segment income tax expense years 2020 2019 2018 follows segment information additional information segmentation major equity affiliates contained note 13 page 77 information related properties plant equipment segment contained note 16 page 82 notes consolidated financial statements millions dollars except pershare amounts note 13 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates nonequity investments including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2020 company’s carrying value investment tco 100 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets included investment loan tco fund development future growth wellhead pressure management project balance 4825 petropiar chevron 30 percent interest petropiar joint stock company operates heavy oil huyapari field upgrading project venezuela’s orinoco belt 2020 company fully impaired investments petropiar affiliate effective july 1 2020 began accounting venture nonequity method investment december 31 2020 underlying equity petropiar’s net assets approximately 1500 petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela 2020 company fully impaired investments petroboscan affiliate effective july 1 2020 began accounting venture nonequity method investment december 31 2020 underlying equity petroboscan’s net assets approximately 1100 company also outstanding longterm loan petroboscan 560 yearend 2020 caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium provides critical export route crude oil tco karachaganak angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets noble midstream equity affiliates noble midstream fully consolidated subsidiary chevron equity investments entities operate midstream assets united states december 31 2020 equity investments included notes consolidated financial statements millions dollars except pershare amounts advantage pipeline llc 50 percent delaware crossing llc 50 percent epic crude holdings 30 percent epic ygrade 15 percent epic propane 15 percent saddlehorn pipeline company llc 20 percent chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy south korea joint venture imports refines markets petroleum products petrochemicals lubricants information “sales operating revenues” consolidated statement income includes 6038 8006 10378 affiliated companies 2020 2019 2018 respectively “purchased crude oil products” includes 3003 5694 6598 affiliated companies 2020 2019 2018 respectively “accounts notes receivable” consolidated balance sheet includes 807 810 due affiliated companies december 31 2020 2019 respectively “accounts payable” includes 244 506 due affiliated companies december 31 2020 2019 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron’s net loans affiliates 5153 4331 3402 december 31 2020 2019 2018 respectively note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party six pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador texaco petroleum company texpet subsidiary texaco inc minority member oil production consortium ecuadorian stateowned petroecuador 1967 1992 termination consortium thirdparty environmental audit ecuador consortium parties entered settlement agreement specifying texpet’s remediation obligations following texpet’s completion threeyear remediation program ecuador certified remediation proper released texpet affiliates environmental liability may 2003 plaintiffs alleging environmental harm consortium’s activities sued chevron superior court lago agrio ecuador february 2011 court entered judgment chevron approximately 9500 plus additional punitive damages appellate panel affirmed ecuador’s national court justice ratified judgment nullified punitive damages resulting judgment approximately 9500 ecuador’s highest constitutional court rejected chevron’s final appeal july 2018 february 2011 chevron sued lago agrio plaintiffs several lawyers supporters us district court southern district new york sdny violations racketeer influenced corrupt organizations rico act state law sdny court ruled ecuadorian judgment procured fraud bribery corruption prohibited rico defendants seeking enforce ecuadorian judgment united states profiting illegal acts court appeals second circuit affirmed us supreme court denied certiorari june 2017 rendering final us judgment favor chevron lago agrio plaintiffs sought notes consolidated financial statements millions dollars except pershare amounts ecuadorian judgment recognized enforced canada brazil argentina recognition enforcement actions dismissed resolved chevron’s favor chevron texpet filed arbitration claim ecuador september 2009 arbitral tribunal administered permanent court arbitration hague united statesecuador bilateral investment treaty august 2018 tribunal issued award holding ecuadorian judgment based environmental claims ecuador settled released procured fraud bribery corruption according tribunal ecuadorian judgment “violates international public policy” “should recognized enforced courts states” tribunal ordered ecuador remove status enforceability ecuadorian judgment compensate chevron injuries resulting judgment third final phase arbitration determine amount compensation ecuador owes chevron ongoing september 2020 district court hague denied ecuador’s request set aside tribunal’s award stating “common ground” ecuador chevron ecuadorian judgment fraudulent december 2020 ecuador appealed district court’s decision hague court appeals separate proceeding ecuador also admitted ecuadorian judgment fraudulent public filing office united states trade representative july 2020 management’s assessment ultimate outcome foregoing matters including financial effect chevron remains uncertain chevron continues believe ecuadorian judgment illegitimate unenforceable provide basis upon estimate reasonably possible loss range loss made note 15 taxes reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table includes onetime tax costs benefits associated changes uncertain tax positions valuation allowances 2020 decrease income tax expense 4583 result yearoveryear decrease total income tax expense primarily due lower crude oil prices 2020 partially offset lower impairment write notes consolidated financial statements millions dollars except pershare amounts charges company’s effective tax rate changed 49 percent 2019 25 percent 2020 change effective tax rate consequence mix effect resulting absolute level earnings losses whether arose higher lower tax rate jurisdictions company records deferred taxes taxjurisdiction basis reported deferred tax balances composed following deferred tax liabilities decreased 403 yearend 2019 decrease properties plant equipment temporary differences partially offset increase investments properties plant equipment decrease primarily due upstream impairments deferred tax assets increased 3621 yearend 2019 increase primarily related increases tax loss carryforwards various locations miscellaneous items related foreign exchange foreign tax credits acquired purchase noble overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences valuation allowance reduces deferred tax assets amounts management’s assessment likely realized end 2020 company gross tax loss carryforwards approximately 19763 tax credit carryforwards approximately 1056 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2021 2034 us foreign tax credit carryforwards 10585 expire 2021 2030 december 31 2020 2019 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely indefinite reinvestment assertion continues apply purpose determining deferred tax liabilities us state foreign withholding tax purposes us state foreign withholding taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 52100 december 31 2020 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount state foreign taxes might payable possible remittance earnings intended reinvested indefinitely company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested notes consolidated financial statements millions dollars except pershare amounts uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2020 2019 2018 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included approximately 83 percent 5018 unrecognized tax benefits december 31 2020 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2020 jurisdictions latest years income tax examinations finalized follows united states 2013 nigeria 2007 australia 2009 kazakhstan 2012 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2020 accrual benefit 95 anticipated interest penalty included consolidated balance sheet compared accrual charges 30 yearend 2019 income tax expense benefit associated interest penalties 124 3 8 2020 2019 2018 respectively notes consolidated financial statements millions dollars except pershare amounts note 16 properties plant equipment1 1other united states australia country accounted 10 percent company’s net properties plant equipment ppe 2020 australia ppe 48060 51359 53768 2020 2019 2018 respectively gross investment cost net investment additions cost 2020 include 16703 associated noble acquisition 2net dry hole expense related prior years’ expenditures 709 49 343 2020 2019 2018 respectively 3depreciation expense includes accretion expense 560 628 654 2020 2019 2018 respectively impairments 2792 10797 735 2020 2019 2018 respectively notes consolidated financial statements millions dollars except pershare amounts note 17 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2020 company interest rate swaps shortterm debt december 31 2020 company 9825 364day committed credit facilities various major banks enable refinancing shortterm obligations longterm basis credit facilities allow company convert amounts outstanding term loan period one year supports commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facility would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facility december 31 2020 company classified 9825 9750 shortterm debt longterm december 31 2020 2019 respectively settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis notes consolidated financial statements millions dollars except pershare amounts note 18 longterm debt total longterm debt including finance lease liabilities december 31 2020 42767 company’s longterm debt outstanding yearend 2020 2019 follows chevron automatic shelf registration statement expires august 2023 registration statement unspecified amount nonconvertible debt securities issued guaranteed chevron corporation cusa longterm debt excluding finance lease liabilities principal balance 33507 matures follows 2021 2600 2022 5548 2023 6475 2024 1650 2025 4000 2025 13234 company completed bond issuances 8000 4000 may august 2020 respectively chevron also assumed total debt including finance lease obligations fair value approximately 9400 associated acquisition noble october 5 2020 included debt assumed noble senior notes aggregate principal amount 5800 interest rates ranging 3250 percent 8000 percent maturity dates ranging 2023 2049 january 6 2021 chevron announced aggregate principal amount 5697 prior noble senior notes exchanged new notes consolidated financial statements millions dollars except pershare amounts senior notes issued cusa guaranteed chevron interest rates maturity dates noble senior notes aggregate principal amount 5697 prior noble notes validly tendered accepted subsequently terminated following termination 103 aggregate principal amount remains outstanding across ten series senior notes issued noble chevron provided guarantee indentures modified eliminate financial reporting credit rating requirements february 2021 indenture governing noble’s 7250 percent senior debentures due 2097 modified provide guarantee chevron eliminate financial reporting credit rating requirements see note 7 beginning page 71 information concerning fair value company’s longterm debt note 19 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense following table indicates changes company’s suspended exploratory well costs three years ended december 31 2020 represents fair value well costs acquired noble acquisition 2019 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling aging former noble wells based date drilling completed rather chevron’s october 2020 acquisition noble certain projects multiple wells fields 2486 exploratory well costs capitalized one year december 31 2020 1197 related 7 projects drilling activities underway firmly planned near future 1289 balance related 10 projects areas requiring major capital expenditure production could begin additional drilling efforts underway firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1289 referenced following activities associated assessing reserves projects’ economic viability 826 seven projects undergoing frontend engineering design final investment decision expected within four years b 463 three projects development alternatives review progress made 17 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects half decisions expected occur next five years notes consolidated financial statements millions dollars except pershare amounts 2486 suspended well costs capitalized period greater one year december 31 2020 represents 89 exploratory wells 17 projects tables contain aging costs well project basis note 20 stock options sharebased compensation expense stock options 2020 2019 2018 94 74 tax 81 64 tax 105 83 tax respectively addition compensation expense stock appreciation rights restricted stock performance shares restricted stock units 96 76 tax 313 266 tax 60 47 tax 2020 2019 2018 respectively significant stockbased compensation cost capitalized december 31 2020 december 31 2019 cash received payment option exercises sharebased payment arrangements 2020 2019 2018 226 1090 1159 respectively actual tax benefits realized tax deductions option exercises 8 43 2020 2019 2018 respectively cash paid settle performance shares restricted stock units stock appreciation rights 95 119 157 2020 2019 2018 respectively cash paid 2020 included 11 million noble awards paid changeincontrol plan provisions awards chevron longterm incentive plan ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance shares nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards issued january 1 2017 contractual terms vary three years performance shares restricted stock units 10 years stock options stock appreciation rights awards issued january 1 2017 contractual terms vary three years performance shares special restricted stock units five years standard restricted stock units 10 years stock options stock appreciation rights forfeitures performance shares restricted stock units stock appreciation rights recognized occur forfeitures stock options estimated using historical forfeiture data dating back 1990 noble sharebased plans noble plans closing acquisition noble october 2020 outstanding stock options granted various noble plans exchanged fully vested chevron options conversion rate 01191 chevron shares noble share awards retained provision original noble plans awards issued may exercised 5 years termination employment depending upon termination type original expiration date whichever earlier awards issued noble plans included restricted stock phantom stock units performance shares retained provisions original noble plans upon termination employment due changeincontrol unvested awards issued noble plans including stock options restricted stock phantom stock units performance shares become vested termination date fair value assumptions fair market values stock options stock appreciation rights granted 2020 2019 2018 measured date grant using blackscholes optionpricing model following weightedaverage assumptions notes consolidated financial statements millions dollars except pershare amounts 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity including noble 2020 presented total intrinsic value ie difference exercise price market price options exercised 2020 2019 2018 92 516 506 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2020 57 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plan cost expected recognized weightedaverage period 17 years january 1 2020 number ltip performance shares outstanding equivalent 4386784 shares 2020 2064598 performance shares granted 676282 shares vested cash proceeds distributed recipients 1340303 shares forfeited december 31 2020 performance shares outstanding 4434797 fair value liability recorded instruments 385 measured using monte carlo simulation method january 1 2020 number restricted stock units outstanding equivalent 2512345 shares 2020 1253337 restricted stock units granted 165007 units vested cash proceeds distributed recipients 296742 units forfeited december 31 2020 restricted stock units outstanding 3303933 fair value liability recorded vested portion instruments 197 valued stock price december 31 2020 addition outstanding stock appreciation rights granted ltip totaled approximately 41 million equivalent shares december 31 2020 fair value liability recorded vested portion instruments 34 note 21 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement benefit opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs company’s main us medical plan increase premedicare company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet notes consolidated financial statements millions dollars except pershare amounts funded status company’s pension opeb plans 2020 2019 follows amounts recognized consolidated balance sheet company’s pension opeb plans december 31 2020 2019 include years ended december 31 2020 december 31 2019 increase benefit obligations primarily due actuarial losses caused lower discount rates used value obligations amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 7278 6357 end 2020 2019 respectively amounts consisted accumulated benefit obligations us international pension plans 13608 5758 respectively december 31 2020 12781 5203 respectively december 31 2019 information us international pension plans accumulated benefit obligation excess plan assets december 31 2020 2019 notes consolidated financial statements millions dollars except pershare amounts components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2020 2019 2018 shown table assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2020 company used expected longterm rate return 650 percent us pension plan assets account 65 percent company’s pension plan assets 2019 2018 company used longterm rate return 675 percent plans marketrelated value assets main us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense notes consolidated financial statements millions dollars except pershare amounts discount rate discount rate assumptions used determine us international pension opeb plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific company’s plans yields highquality bonds projected cash flows discounted valuation date using yield curve main us pension opeb plans effective discount rates derived analysis end 2020 24 main us pension plan 24 main us opeb plan discount rates plans end 2019 31 percent respectively 2018 42 43 percent plans respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2020 main us opeb plan assumed health care costtrend rates start 61 percent 2021 gradually decline 45 percent 2027 beyond measurement december 31 2019 assumed health care costtrend rates started 68 percent 2020 gradually declined 45 percent 2025 beyond plan assets investment strategy fair value measurements company’s pension plans 2020 2019 follows 1us equities include investments company’s common stock amount 4 december 31 2020 6 december 31 2019 2collective trustsmutual funds us plans entirely index funds international plans mostly unit trust index funds 3mixed funds composed funds invest equity fixedincome instruments order diversify lower risk 4the yearend valuations us real estate assets based thirdparty appraisals occur least year property portfolio 5the “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts level 3 investments privateequity limited partnerships nav notes consolidated financial statements millions dollars except pershare amounts effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 91 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan company’s investment committee established following approved asset allocation ranges equities 4065 percent fixed income 2040 percent real estate 015 percent alternative investments 05 percent cash 025 percent uk pension plan uk board trustees established following asset allocation guidelines equities 1030 percent fixed income 5585 percent real estate 515 percent cash 05 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety factors including market conditions illiquidity constraints mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2020 company contributed 950 263 us international pension plans respectively 2021 company expects contributions approximately 1050 us plans 200 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments tax law changes economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying opeb benefits approximately 153 2021 155 paid 2020 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 281 284 270 2020 2019 2018 respectively notes consolidated financial statements millions dollars except pershare amounts benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2020 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2020 2019 trust assets 36 35 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 462 826 1048 2020 2019 2018 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 20 beginning page 86 note 22 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page 79 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provisions made years examination subject future examination guarantees company two guarantees equity affiliates totaling 391 amount 137 associated financing arrangement equity affiliate approximate 1year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 254 associated certain payments terminal use agreement entered equity affiliate approximate 7year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements may relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2021 1000 2022 1200 2023 1300 2024 1300 2025 1400 2026 8400 portion commitments may notes consolidated financial statements millions dollars except pershare amounts ultimately shared project partners total payments agreements approximately 500 2020 800 2019 1400 2018 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various operating closed divested sites including limited federal superfund sites analogous sites state laws refineries chemical plants marketing facilities crude oil fields mining sites although company provided known environmental obligations probable reasonably estimable likely company continue incur additional liabilities amount additional future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity chevron’s environmental reserve december 31 2020 1139 included balance 247 related remediation activities approximately 145 sites company identified potentially responsible party provisions federal superfund law analogous state laws provide joint several liability responsible parties future actions regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2020 environmental reserves balance 892 611 related company’s us downstream operations 47 international downstream operations 233 upstream operations 1 businesses liabilities sites primarily associated company’s plans activities remediate soil groundwater contamination company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2020 recorded liability material company’s results operations consolidated financial position liquidity refer note 23 page 94 discussion company’s asset retirement obligations contingencies governmental entities california jurisdictions filed legal proceedings fossil fuel producing companies including chevron purporting seek legal equitable relief address alleged impacts climate change proceedings likely filed parties unprecedented legal theories set forth proceedings entail possibility damages liability injunctions production fossil fuels believe remote could material adverse effect company’s results operations financial condition management believes proceedings legally factually meritless detract constructive efforts address important policy issues presented climate change vigorously defend proceedings seven coastal parishes state louisiana filed 43 separate lawsuits louisiana numerous oil gas companies seeking damages coastal erosion near oil fields located within louisiana’s coastal zone louisiana’s state local coastal resources management act slcrma chevron entities defendants 39 cases lawsuits allege defendants’ historical operations conducted without necessary permits failed comply permits obtained seek damages relief including costs restoring coastal wetlands allegedly impacted oil field operations plaintiffs’ slcrma theories unprecedented thus remains significant uncertainty scope claims alleged damages potential effects company’s results operations financial condition management believes claims lack legal factual merit continue vigorously defend proceedings chevron receives claims submits claims customers trading partners joint venture partners us federal state local regulatory bodies governments contractors insurers suppliers individuals amounts claims notes consolidated financial statements millions dollars except pershare amounts individually aggregate may significant take lengthy periods resolve may result gains losses future periods company affiliates also continue review analyze operations may close retire sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result significant gains losses future periods note 23 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2020 2019 2018 table amount associated “revisions estimated cash flows” 2020 reflects increased cost estimates decommission wells equipment facilities longterm portion 13616 balance end 2020 11877 note 24 revenue contracts customers presented “sales operating revenue” along activity accounted outside scope accounting standard codification asc 606 material line consolidated statement income purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income refer note 12 beginning page 74 additional information company’s segmentation revenue receivables related revenue contracts customers included “accounts notes receivable net” consolidated balance sheet net allowance doubtful accounts net balance receivables 7631 9247 december 31 2020 december 31 2019 respectively items included “accounts notes receivable net” represent amounts due partners share joint venture operating project costs amounts due others primarily related derivatives leases buysell arrangements product exchanges accounted outside scope asc 606 contract assets related costs reflected “prepaid expenses current assets” contract liabilities reflected “accrued liabilities” “deferred credits noncurrent obligations” consolidated balance sheet amounts items material company’s financial position notes consolidated financial statements millions dollars except pershare amounts note 25 financial information earnings 2020 included aftertax gains approximately 765 relating sale certain properties amount approximately 30 735 related downstream upstream respectively earnings 2019 included aftertax gains approximately 1500 relating sale certain properties approximately 50 1450 related downstream upstream assets respectively earnings 2018 included aftertax gains approximately 630 relating sale certain properties approximately 365 265 related downstream upstream assets respectively earnings 2020 included aftertax charges approximately 4800 impairments asset writeoffs related upstream earnings 2019 included aftertax charges approximately 10400 impairments asset writeoffs related upstream earnings 2018 included aftertax charges approximately 2000 impairments asset writeoffs related upstream includes 152 28 416 2020 2019 2018 respectively company’s share equity affiliates’ foreign currency effects company 4402 goodwill consolidated balance sheet upstream segment primarily related 2005 acquisition unocal company tested goodwill impairment 2020 impairment required note 26 summarized financial data chevron phillips chemical company llc chevron 50 percent equity ownership interest chevron phillips chemical company llc cpchem refer note 13 page 77 discussion cpchem operations summarized financial information 100 percent cpchem presented table note 27 restructuring reorganization costs 2020 company recorded severance accruals adjustments employee reduction programs related enterprisewide restructuring expected substantially completed end 2021 beforetax charge 859 670 aftertax recorded 2020 690 reported operating expenses 169 reported “selling general administrative expenses consolidated statement income approximately 127 97 aftertax associated terminations us upstream 288 228 aftertax international upstream 112 85 aftertax us downstream 69 54 aftertax international downstream 263 206 aftertax notes consolidated financial statements millions dollars except pershare amounts 2020 company made payments 396 associated liabilities following table summarizes accrued severance liability classified current consolidated balance sheet note 28 financial instruments credit losses chevron adopted accounting standards update asu 201613 financial instruments credit losses related amendments effective date january 1 2020 standard replaces “incurred loss model” requires estimate expected credit losses measured contractual life financial instrument considers forecast future economic conditions addition information past events current conditions cumulativeeffect adjustment opening retained earnings january 1 2020 reduction 25 representing decrease net accounts notes receivable balances shown company’s consolidated balance sheet page 61 chevron’s expected credit loss allowance balance 671 december 31 2020 849 december 31 2019 majority allowance relating nontrade receivable balances reduction allowance nontrade receivables 550 recorded second quarter agreement reached government joint venture partner resulted writeoff associated receivable balances additionally new allowances 265 recorded second third quarters associated trade receivables majority company’s receivable balance concentrated trade receivables balance 95 billion december 31 2020 reflects company’s diversified sources revenues dispersed across company’s broad worldwide customer base result company believes concentration credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable forms collateral credit extended receivable balance exists company applies quantitative calculation current trade receivable balances reflects credit risk predictive analysis including probability default loss given default takes consideration current forwardlooking market data well company’s historical loss data statistical approach becomes basis company’s expected credit loss allowance current trade receivables payment terms typically shortterm nature due less 90 days company continues monitor credit risk response covid19 pandemic significant reduction crude prices resulting decreased demand associated governmentmandated travel restrictions chevrons nontrade receivable balance 33 billion december 31 2020 includes receivables certain governments capacity joint venture partners joint venture partner balances paid per contract terms yet due subject statistical analysis described past due balances subject additional qualitative management quarterly review management review includes review reasonable supportable repayment forecasts nontrade receivables also include employee tax receivables deemed immaterial low risk equity affiliate loans also considered nontrade second quarter 2020 review 560 allowance recognized within “investments advances” consolidated balance sheet note 29 acquisition noble energy inc october 5 2020 company acquired noble energy inc independent oil gas exploration production company noble’s principal upstream operations united states eastern mediterranean west africa noble’s operations also include integrated midstream business united states acquisition noble provides company lowcost proved reserves attractive undeveloped resources cashgenerating assets aggregate purchase price noble 4109 approximately 58 million shares chevron common stock issued consideration transaction representing approximately 3 percent shares chevron common stock outstanding notes consolidated financial statements millions dollars except pershare amounts immediately acquisition part transaction company recognized longterm debt finance leases fair value 9231 acquisition accounted business combination asc 805 requires assets acquired liabilities assumed measured acquisition date fair values provisional fair value measurements made acquired assets liabilities adjustments measurements may made subsequent periods one year acquisition date information necessary complete analysis obtained oil gas properties valued using discounted cash flow approach incorporated internally generated price assumptions production profiles together appropriate operating cost development cost assumptions debt assumed acquisition valued based observable market prices noble’s debt result measuring assets acquired liabilities assumed fair value goodwill bargain purchase recognized following table summarizes values assigned assets acquired liabilities assumed following unaudited pro forma summary presents results operations acquisition noble occurred january 1 2019 pro forma summary uses estimates assumptions based information available time management believes estimates assumptions reasonable however actual results may differ significantly pro forma financial information pro forma information reflect synergistic savings might achieved combining operations intended reflect actual results would occurred companies actually combined periods presented fiveyear financial summary unaudited supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s table costs incurred exploration property acquisitions development1 supplemental information oil gas producing activities unaudited estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 13 beginning page 77 discussion company’s major equity affiliates supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2020 2019 2018 shown following table net income loss exploration production activities reported page 75 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page 75 1the value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2represents accretion aro liability refer note 23 “asset retirement obligations” page 94 3includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued 1the value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2represents accretion aro liability refer note 23 “asset retirement obligations” page 94 3includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 1the value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved number organizations including society petroleum engineers world petroleum congress american association petroleum geologists company classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved reserves probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods proved undeveloped reserves quantities expected recovered new wells undrilled acreage existing wells relatively major expenditure required recompletion due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager global reserves organization separate upstream operating organization supplemental information oil gas producing activities unaudited manager global reserves 30 years’ experience working oil gas industry holds undergraduate graduate degrees geoscience experience includes various technical management roles providing reserve resource estimates support major capital exploration projects 10 years overseeing oil gas reserves processes named distinguished lecturer american association petroleum geologists active member american association petroleum geologists sepm society sedimentary geologists society petroleum engineers rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain chevron corporation reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s senior leadership team including chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance chevron corporation reserves manual acquisition noble completed october 5 2020 given timing acquisition chevron continued rely legacy noble reserves staff processes reviewing reserves input guidance chevron reserves advisory committee processes include internal reviews external audit accordingly chevron continued retain netherland sewell associates inc nsai thirdparty petroleum consulting firm completed audit legacy noble acquisition proved reserves december 31 2020 representing approximately 15 chevron’s total reserves based upon evaluation nsai issued unqualified audit opinion report attached exhibit 993 annual report form 10k technologies used establishing proved reserves additions 2020 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves noteworthy changes proved undeveloped reserves shown table discussed following page supplemental information oil gas producing activities unaudited 2020 revisions include reduction 392 million boe united states primarily midland delaware basins 300 million boe attributed demotions due capital reductions commodity price effects performance revisions 75 million boe gulf mexico primarily commodity price effects anchor australia net reduction 269 million boe primarily demotion compression volumes related capital approval delays jansz io partially offset positive revisions gorgon jansz io make gorgon project reduction 85 million boe recorded canada primarily commodity price effects kaybob duvernay nigeria reduction 67 million boe primarily gas volume changes based reduced demand development plan changes meren venezuela demotion 48 million boe due impairment accounting methodology change negative revisions partially offset increase 143 million boe kazakhstan primarily entitlement effects tco karachaganak 2020 extensions discoveries 108 million boe united states primarily due portfolio optimizations future drilling various fields targeted toward liquidsrich reservoirs higher execution efficiencies midland delaware basins differences 2020 extensions discoveries 124 million boe net quantities proved reserves 247 million boe reflected pages 106 109 net quantities proved undeveloped 123 million boe primarily due proved extensions discoveries recognized puds prior year rather recognized directly proved developed purchases 329 million boe 2020 include 326 million boe noble acquisition primarily israel dj basin united states sales 95 million boe 2020 include 77 million boe sale company’s interest azerbaijan transfers proved developed reserves 2020 include 178 million boe united states primarily midland delaware basin developments 84 million boe canada kazakhstan international locations transfers consequence development expenditures completing wells facilities 2020 investments totaling approximately 63 billion oil gas producing activities 01 billion nonoil gas producing activities expended advance development proved undeveloped reserves asia expenditures year totaled approximately 34 billion primarily related development projects tco affiliate kazakhstan united states accounted 21 billion related primarily various development activities midland delaware basins gulf mexico africa 03 billion expended various offshore development natural gas projects nigeria angola republic congo development activities canada international locations primarily responsible 05 billion expenditures reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2020 company held approximately 16 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 400 million boe remain undeveloped five years related gorgon wheatstone projects field development convert remaining proved undeveloped reserves scheduled occur line operating constraints infrastructure optimization africa approximately 200 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos gas projects nigeria affiliates account 13 billion boe proved undeveloped reserves 900 million boe remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion facility constraints annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2020 decreases commodity prices negatively impacted economic limits oil gas properties resulting proved reserve decreases positively impacted proved reserves due entitlement effects yearend reserves quantities updated circumstances significant changes discussed appropriate reserves supplemental information oil gas producing activities unaudited sections past three years ratio proved undeveloped reserves total proved reserves ranged 31 percent 38 percent proved reserve quantities three years ending december 31 2020 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2020 proved reserves company 111 billion boe company’s estimated net proved reserves liquids including crude oil condensate synthetic oil years 2018 2019 2020 shown table page 107 company’s estimated net proved reserves natural gas liquids shown page 108 company’s estimated net proved reserves natural gas shown page 109 noteworthy changes crude oil condensate synthetic oil proved reserves 2018 2020 discussed shown table following page revisions 2018 improved field performance various gulf mexico fields midland delaware basins primarily responsible 121 million barrel increase united states improved field performance various fields including agbami nigeria mohobilondo republic congo responsible 61 million barrel increase africa reserves americas increased 59 million barrels primarily due improved field performance hebron field canada asia improved performance across numerous assets resulted 37 million barrel increase 2019 portfolio optimizations future drilling various fields midland delaware basins targeted away reservoirs higher gastooil ratios lower execution efficiencies planned divestments appalachian basin primarily responsible 153 million barrel decrease united states operational issues petropiar upgrader venezuela resulted decrease reserves synthetic oil 126 million barrels increase crude oil condensate reserves 105 million barrels reservoir management entitlement effects mainly responsible 75 million barrels increase tco affiliate kazakhstan improved field performance various fields including mohobilondo republic congo mafumeria angola sonam nigeria responsible 42 million barrel increase africa 2020 capital reductions commodity price effects midland delaware basins anchor gulf mexico primarily responsible 279 million barrels decrease united states reserves venezuela affiliates decreased 149 million barrels primarily due impairments accounting methodology change entitlement effects performance revisions tco affiliate primarily responsible 180 million barrels increase entitlement effects primarily contributed increase 77 million barrels synthetic oil athabasca oil sands canada 74 million barrels multiple locations asia extensions discoveries 2018 extensions discoveries midland delaware basins primarily responsible 359 million barrel increase united states extensions discoveries duvernay shale canada loma campana argentina primarily responsible 31 million barrel increase americas 2019 portfolio optimizations future drilling various fields midland delaware basins targeted towards liquidsrich reservoirs higher execution efficiencies extensions discoveries deepwater fields gulf mexico primarily responsible 394 million barrel increase united states extensions discoveries loma campana argentina primarily responsible 39 million barrel increase americas 2020 extensions discoveries midland delaware basins primarily responsible 105 million barrels increase united states purchases 2018 purchases 31 million barrels united states primarily midland delaware basins 2020 acquisition noble assets contributed 227 million barrels dj basin midland delaware basins united states sales 2019 sales 69 million barrels europe united kingdom denmark 2020 sale 99 million barrels asia azerbaijan supplemental information oil gas producing activities unaudited net proved reserves crude oil condensate synthetic oil 1ending reserve balances north america 166 230 269 south america 94 90 72 2020 2019 2018 respectively 2reserves associated canada 3ending reserve balances africa 3 south america 0 156 64 2020 2019 2018 respectively 4included yearend reserve quantities related productionsharing contracts psc refer page e7 definition psc pscrelated reserve quantities 9 percent 11 percent 14 percent consolidated companies 2020 2019 2018 respectively noteworthy changes natural gas liquids proved reserves 2018 2020 discussed shown table following page revisions 2018 improved field performance midland delaware basins primarily responsible 34 million barrel increase united states 2019 portfolio optimizations low price realizations various fields midland delaware basins planned divestments appalachian basin mainly responsible 120 million barrel decrease united states 2020 capital reductions commodity price effects various fields midland delaware basins primarily responsible 71 million barrels decrease united states extensions discoveries 2018 extensions discoveries midland delaware basins primarily responsible 173 million barrel increase united states 2019 extensions discoveries midland delaware basins deepwater fields gulf mexico primarily responsible 140 million barrel increase united states 2020 extensions discoveries various fields midland delaware basins primarily responsible 60 million barrels increase united states purchases 2020 acquisition noble assets contributed 198 million barrels primarily denver julesburg basin midland delaware basins eagle ford shale united states supplemental information oil gas producing activities unaudited net proved reserves natural gas liquids 1reserves associated north america 2reserves associated africa 3yearend reserve quantities related productionsharing contracts psc refer page e7 definition psc material 2020 2019 2018 respectively noteworthy changes natural gas proved reserves 2018 2020 discussed shown table revisions 2018 reservoir performance well test surveillance data wheatstone greater gorgon area responsible 10 tcf increase australia bibiyana field bangladesh pattani field thailand primarily responsible 347 bcf increase asia improved performance midland delaware basins primarily responsible 258 bcf increase united states 2019 strong performances wheatstone greater gorgon areas mainly responsible 17 tcf increase australia tco affiliate kazakhstan reservoir management entitlement effects mainly responsible 223 bcf increase portfolio optimizations low price realizations various fields midland delaware basins planned divestments appalachian basin mainly responsible 26 tcf decrease united states 2020 demotion jansz io compression project reserves lower field performance partially offset positive revisions gorgon mainly responsible net 25 tcf decrease australia capital reductions commodity price effects various fields midland delaware basins mainly responsible 509 bcf decrease united states africa 229 bcf decrease primarily due reduced demand development plan changes meren nigeria extensions discoveries 2018 extensions discoveries 16 tcf united states primarily appalachian region midland delaware basins 2019 extensions discoveries 10 tcf united states primarily midland delaware basins 2020 extensions discoveries 385 bcf united states primarily midland delaware basins supplemental information oil gas producing activities unaudited purchases 2020 acquisition noble assets contributed 54 tcf israel asia 15 tcf denver julesburg basin midland delaware basins eagle ford shale united states 441 bcf equatorial guinea africa sales 2019 sales 240 bcf europe united kingdom denmark 2020 sales 13 tcf primarily appalachian basin united states 264 bcf primarily azerbaijan asia net proved reserves natural gas 1ending reserve balances north america south america 234 462 582 95 274 281 2020 2019 2018 respectively 2ending reserve balances africa south america 898 802 799 0 64 110 2020 2019 2018 respectively 3total “as sold” volumes 2447 2379 2289 2020 2019 2018 respectively 4includes reserve quantities related productionsharing contracts psc refer page e7 definition psc pscrelated reserve quantities 10 percent 10 percent 10 percent consolidated companies 2020 2019 2018 respectively supplemental information oil gas producing activities unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations includes costs retire existing wells facilities addition future wells facilities necessary produce proved undeveloped reserves estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” part iv item 15item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements page report independent accountants fs14 consolidated statement income three years ended december 31 1997 fs14 consolidated balance sheet december 31 1997 1996 fs15 consolidated statement cash flows three years ended december 31 1997 fs16 consolidated statement stockholders equity three years ended december 31 1997 fs17 notes consolidated financial statements fs18 fs31 2 financial statement schedules caltex group companies combined financial statements c1 c24 combined financial statements caltex group companies filed part report schedules omitted applicable required information included combined financial statements notes thereto 3 exhibits exhibit index pages 37 38 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k dated december 22 1997 filed company december 22 1997 report chevron included press release issued caltex petroleum corporation 50 percent owned affiliate december 19 1997 announcing elected change functional currency korean japanese operations us dollar effective october 1 1997 2 current report form 8k dated january 29 1998 filed company january 29 1998 report chevron announced preliminary unaudited earnings year ended december 31 1997 3 current report form 8k dated february 3 1998 filed company february 3 1998 report chevron announced revised preliminary unaudited earnings year ended december 31 1997 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 25th day march 1998 chevron corporation kenneth derr kenneth derr chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 25th day march 1998 principal executive officers directors kenneth derr samuel h armacost kenneth derr chairman board samuel h armacost james n sullivan sam ginn james n sullivan vicechairman board sam ginn carla hills carla hills j bennett johnston j bennett johnston richard h matzke principal financial officer richard h matzke martin r klitten charles pigott martin r klitten vicepresident charles pigott chief financial officer condoleezza rice principal accounting officer condoleezza rice stephen j crowe frank shrontz stephen j crowe comptroller frank shrontz changlin tien changlin tien george h weyerhaeuser george h weyerhaeuser lydia beebe john young lydia beebe attorneyinfact john young exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated august 2 1994 filed exhibit 31 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 32 bylaws chevron corporation amended july 27 1994 including provisions giving attorneysinfact authority sign behalf officers corporation filed exhibit 32 chevron corporations quarterly report form 10q quarter six month period ended june 30 1994 incorporated herein reference 41 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated november 22 1988 incorporated herein reference 42 amendment 1 dated december 7 1989 rights agreement dated november 22 1988 chevron corporation manufacturers hanover trust company california rights agent filed exhibit 40 chevron corporations current report form 8k dated december 7 1989 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 management incentive plan chevron corporation amended restated effective october 30 1996 filed appendix b chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 102 chevron corporation excess benefit plan amended restated july 1 1996 filed exhibit 10 chevron corporations report form 10q quarterly period ended march 31 1997 incorporated herein reference 103 supplemental pension plan gulf oil corporation amended june 30 1986 filed exhibit 104 chevron corporations annual report form 10k 1986 incorporated herein reference 104 chevron restricted stock plan nonemployee directors amended restated effective april 30 1997 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 105 chevron corporation longterm incentive plan amended restated effective october 30 1996 filed appendix c chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 106 chevron corporation salary deferral plan management employees effective january 1 1997 filed exhibit 10 chevron corporations report form 10q quarterly period ended june 30 1997 incorporated herein reference exhibit index continued exhibit description 121 computation ratio earnings fixed charges page e1 211 subsidiaries chevron corporation page e2 231 consent price waterhouse llp page e3 232 consent kpmg peat marwick llp page e4 241 powers attorney directors certain officers chevron corporation authorizing signing 2415 annual report form 10k behalf 271 financial data schedule 991 definitions selected financial terms page e5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 575 market street san francisco california 94105 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs2 fs13 report management fs13 consolidated income statement fs14 report independent accountants fs14 consolidated balance sheet fs15 consolidated statement cash flows fs16 consolidated statement stockholders equity fs17 notes consolidated financial statements fs18 fs31 quarterly results stock market data fs31 supplemental information oil gas producing activities fs32 fs37 fiveyear financial summary fs38 fs1 managements discussion analysis financial condition results operations 1997 highlights net income 3256 billion 1997 second consecutive year record earnings operating earnings 3180 billion also record annual return capital employed excluding special items 147 percent highest decade worldwide oil gas reserves increased fifth consecutive year international liquids production increased eighth consecutive year debt reduced 600 million annual dividend stockholders increased tenth consecutive year 1997 another dividend increase announced january 1998 key financial results chevrons net income 1997 record 3256 billion 25 percent net income 2607 billion 1996 250 percent 930 million 1995 net income benefited 76 million special items 1997 reduced net special charges 44 million 1996 373 million 1995in addition adoption new accounting standard 1995 reduced net income 659 million excluding items operating earnings 1997 3180 billion 20 percent 2651 billion earned 1996 62 percent 1962 billion 1995 second year row company earned record profits spite lower crude oil prices company reached earnings goal 3 billion set february 1996 one year ahead target chevrons annual return capital employed excluding special items 147 percent highest decade operating environment outlook spot west texas intermediate wti crude oil price averaged nearly 2540 per barrel december 1996 began decline early 1997 trading 1921 range year december 1997 dropped 1830 per barrel downward trend continued january 1998 averaging 1670 per barrel february 20 1998 wti spot price 1615 per barrel number factors continue exert downward pressure crude oil prices demand growth slowing result asian economic slowdown warm winters united states europe japan time supplies increasing startup new producing fields higher opec quotas production resulting oversupplied world market uncertain long conditions continue addition inventories currently high levels lower crude oil prices 1998 may lead lower revenues earnings experienced 1997 particularly companys exploration production upstream operations however production increases expected 1998 new developments west africa offshore eastern canada hibernia oil field began production november 1997 continued expansion production tengiz field kazakhstan company evaluated capital spending programs conservative price assumptions present time expects fully fund planned 63 billion 1998 capital exploratory expenditure program however low price environment become severe prolonged company ability modify planned expenditures accordingly international refining marketing transportation downstream segment companys caltex affiliates earnings continue affected decline value asian currencies generally led reduced refined products margins local prices trailed increased local currency costs crude oil certain asian countries refined products prices subject governmentprescribed increases result immediate recovery local cost increases addition higher prices refined products caused demand products decline trend continued 1998 may slow rate growth refined products demand previously expected region us chemicals industry entered cyclical downturn latter half 1995 persisted throughout 1996 1997 chevron several major chemicals expansion projects way position company benefit next upturn chemicals industry lowering unit cost structure significant developments april 1997 chevron completed sale 10 percent 50 percent interest tengizchevroil tco joint venture lukarco joint venture russian oil company lukoil arco fs2 company recorded gain 32 million sale second quarter 1997 total liquids production tengiz field 1997 averaged 155000 barrels per day increase 38 percent 1996 average production july tco announced construction fifth oil gas processing train tengiz expected boost production capacity 240000 barrels per day tco continues successfully move crude oil pipeline barge railcar may 1997 chevron acquired 15 percent interest caspian pipeline consortium intends build direct pipeline black sea carry crude tco regional producers elsewhere region company signed agreement republic azerbaijan explore absheron offshore block southern caspian sea february 1998 company announced new caspian region cooperative agreement royal dutchshell group agreement establishes framework two companies jointly identify develop new projects areas exploration production transportation sale crude oil gas liquids natural gas first chevron production crude oil offshore angola began ndola sanha fields april august 1997 respectively company 39 percent interest fields also company announced two giant crude oil discoveries block 14 contract area adjacent companys major areas production companys first finds countrys deep water chevron operator holds 31 percent interest block 14 chevron partners successfully bid operate ll652 oil field venezuelas lake maracaibo chevron 30 percent interest operate field 20year contract beginning 1998 field currently producing 10000 barrels per day partners submitted development plan expected increase fields production estimated potential 115000 barrels per day 2006 first liquefied petroleum gas lpg exports companys escravos nigeria joint venture gas project occurred september project provides commercial outlet lpg derived natural gas produced companys crude oil production chevron planning second phase project increase amount gas processed 110 120 million cubic feet per day current level 175 million cubic feet per day november initial production began hibernia oil development project east coast newfoundland chevron approximate 27 percent interest yearend 1997 production two wells reached 60000 barrels per day chevron acquired 134 additional leases offshore louisiana texas federal sales year furthering intent major participant development gulf mexicos deep waters companys deepwater portfolio consists 362 tracts waters deep 8500 feet including interest genesis project first liquids production expected late 1998 1997 company continued development international chemicals projects including 650 million petrochemicals complex aljubail saudi arabia scheduled completed 1999 plant singapore manufacture additives fuels lubricating oils united states company completed major expansion debottlenecking projects port arthur texas marietta ohio plants chevron sold marketing interests united kingdom including retail network 450 stations lubricants commercial fuels businesses shell uk ltd december company also divested 50 percent equity interest 90000barrelperday catalytic cracking facility pembroke wales connection divestitures company also close 115000barrelperday refinery located near milford wales sell remaining assets thereby completing companys withdrawal refining marketing business united kingdom year 2000 year 2000 twodigit date 00 may recognized computer systems applications developed 1970s 1980s year 2000 causing systems shut malfunction chevron established year 2000 project team coordinate year 2000 efforts teams companys operating units ensure computer systems applications function properly beyond 1999 many companys information systems software year 2000 compliant others currently assessed compliance year 2000 compliance assessment embedded technology companys facilities operating systems also way assessments complete plans modification replacement testing certification developed implemented ensure companys facilities business activities continue operate safely reliably without interruption 1999 teams also monitoring compliance efforts suppliers contractors trading partners chevron business ensure operations adversely affected compliance problems others assessments complete company cannot state certainty whether significant year 2000 issues additionally total amount costs incurred cannot reliably estimated time however based information currently available company reason believe year 2000 issues material results operations consolidated financial position liquidity environmental matters virtually aspects companys businesses subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern companys operations products sells costs complying myriad laws regulations pertaining companys operations products embedded normal costs conducting business using definitions guidelines established american petroleum institute chevron estimates worldwide environmental spending 1997 893 mil fs3 lion consolidated companies included expenditures 237 million environmental capital expenditures 656 million costs associated control abatement hazardous substances pollutants ongoing operations total amount also includes spending charged reserves established prior years environmental cleanup programs noncash provisions increase reserves establish new ones year 1998 total worldwide environmental capital expenditures estimated 265 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities well third party waste disposal sites used company obligation take remedial action may incurred result enactment laws federal superfund law issuance new regulations result companys policies area accidental leaks spills requiring cleanup may occur ordinary course business addition obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable standards existing time require investigatory andor remedial work meet current standards company retained certain environmental cleanup obligations sold port arthur texas refinery 1995 anticipated costs accrued time sale terms sales contract obligations evaluated 1997 resulting confirmation previously recorded reserves adequate 1997 company recorded 57 million beforetax provisions 35 million tax environmental remediation efforts including superfund sites actual expenditures charged provisions previously established reserves amounted 205 million 1997 yearend 1997 companys environmental remediation reserves 987 million including 43 million related superfund sites provisions superfund law environmental protection agency epahas designated chevron potentially responsible party prp otherwise involved remediation 282 hazardous waste sites company made provisions payments 1997 prior years approximately 188 sites single site expected result material liability company time remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposures superfund law provides joint several liability future actions epa regulatory agencies require chevron assume responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity likely company continue incur additional charges beyond reserved environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amounts future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemicals concerns although environmental compliance costs substantial company reason believe vary significantly similar costs incurred companies engaged similar businesses similar areas company believes costs ultimately reflected petroleum chemicals industries prices products services past several years petroleum industry incurred major capital expenditures meet clean air regulations 1990 amendments clean air act united states companies operating california chevron significant presence california air resources board carb imposed even stricter requirements fiveyear period 1991 1995 chevron spent 18 billion capital projects comply air quality measures majority related complying carb requirements manufacture cleanerburning gasoline bulk spending completed 1995 resulted decrease capitalized air quality expenditures approximately 500 million 1995 70 million 1996 74 million 1997 addition reserves environmental remediation company maintains reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives many costs environmentally related provisions recognized unitofproduction basis properties produced amount reserves yearend 1997 15 billion included accumulated depreciation depletion amortization companys consolidated balance sheet companys ongoing operating assets refineries provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made contingencies company defendant lawsuit oxy usa brought capacity successor interest cities service company lawsuit claims damages resulting allegedly improper termination tender offer purchase cities stock 1982 made gulf fs4 oil corporation acquired chevron 1984 trial respect claims ended july 1996 judgment company 742 million including interest continues accrue rate 955 percent per year appeal pending company filed appeal oklahoma supreme court posted bond 15 times amount judgment although ultimate outcome matter cannot determined presently certainty company believes errors committed trial court result judgment reversed appeal lawsuit los angeles california brought 1995 company five oil companies contesting validity patent granted unocal corporation unocal reformulated gasoline company sells california certain months year first two phases trial concluded october november 1997 jury upholding validity patent assessing damages rate 575 cents per gallon gasoline sold infringement patent march 1 july 1 1996 third phase trial judge heard evidence determine patent enforceable matter currently submission ultimate outcome matter cannot determined certainty company believes unocals patent invalid unfavorable rulings reversed upon appeal however jurys findings unocals position ultimately upheld companys exposure respect future reformulated gasoline sales would depend availability alternate formulations industrys ability recover additional costs production prices charged customers june 1997 caltex petroleum corporation received claim us internal revenue service irs 292 million excise taxes 140 million penalties 16 billion interest irs claim relates crude oil sales japanese customers beginning 1980 caltex challenging claim fully expects prevail caltex believes underlying excise tax claim wrong therefore claim penalties interest wrong caltex claim appeals process next move court february 1998 caltex provided initial letter credit 233 billion irs pursue claim letter credit guaranteed chevron texaco addition yet decided portion claim must paid order proceed court company subject lawsuits claims contingent liabilities including along oil companies actions challenging oil gas royalty severance tax payments based posted prices lawsuits contingent liabilities discussed notes accompanying consolidated financial statements company believes resolution matters materially affect consolidated financial position liquidity although losses could material respect earnings given period company utilizes various derivative instruments manage exposure price risk stemming integrated petroleum activities instruments commonly used oil gas trading activities relatively straightforward involve little complexity generally shortterm duration activity instruments intended hedge physical transaction hence gains losses arising instruments offset recognized concurrently gains losses underlying transactions company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps control systems designed monitor manage financial exposures accordance company policies procedures companys operations affected changing economic regulatory political environments various countries operates political uncertainty civil unrest may times threaten safety employees companys continued presence country factors carefully considered evaluating level current future activity countries chevron affiliates continue review analyze operations may close sell exchange purchase restructure assets achieve operational strategic benefits improve competitiveness profitability activities may result significant losses gains income future periods new accounting standards effective december 1997 company adopted two new accounting standards statement financial accounting standards sfas no128 earnings per share sfas 129 disclosure information capital structure sfas 128 requires income statement disclosure basic diluted earnings per share place primary fully diluted earnings per share required previously footnote disclosure calculation method also required adoption sfas 129 required additional disclosures since company previously met requirements june 1997 financial accounting standards board fasb issued sfas 130 reporting comprehensive income sfas 131 disclosures segments enterprise related information company begin reporting comprehensive income compliance sfas 130 beginning first quarter 1998 reporting sfas 131 initially presented financial statements year 1998 company evaluating criteria sfas 131 apply chevrons operations anticipate significant changes reportable segments statements require additional reporting expanded disclosures effect companys results operations financial position capital resources liquidity february 1998 fasb issued sfas 132 employers disclosure pension postretirement benefits revised disclosure requirements pension postretirement benefits affect measurement expense companys pension postretirement benefits fs5 new standards become effective fiscal years beginning december 15 1997 special items net income affected transactions unrelated necessarily representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability years following table summarizes gains losses aftertax basis special items included companys reported net income asset writeoffs revaluations 1997 included 68 million impairment writedowns us oil gas properties 10 million chemical facilities 8 million telecommunications equipment asset writeoffs 1996 related primarily 200 million estimated impairment provision connection companys intent time merge united kingdom refining marketing operations two oil companies additionally 1996 included 68 million impairment writedowns oil gas properties related pipeline investments 29 million adjustment 1995 provision loss anticipated exiting real estate development business including additional amounts environmental remediation 40 million asset writeoffs 1995 asset write offs 304 million recognized connection companys decision exit real estate development business 168 million completion comprehensive review companys fixed asset records 94 million writedown assets made obsolete new facilities required produce californiamandated reformulated gasolines 38 million miscellaneous writeoffs 4 million also effective 1995 company adopted sfas 121 accounting impairment longlived assets longlived assets disposed adoption standard required noncash charges amounting 659 million tax mostly related impairment writedowns us oil gas producing properties asset dispositions 1997 increased earnings net 183 million including net gains 190 million sales us oil gas properties 50 million sale international oil gas properties including sale 10 percent companys ownership interest tco joint venture kazakhstan 33 million sale companys interest chemical affiliate partially offsetting gains charges 90 million increase provisions environmental severance costs associated companys exit uk refining marketing business lease termination costs three oceangoing vessels writedown fair market value asset dispositions 1996 increased earnings 391 million included 279 million gain companys caltex affiliates sale interest two japanese refineries net 80 million gain sales producing properties north sea indonesia gulf mexico 32 million gain merger companys natural gas marketing business natural gas liquids company ngc corporation ngc prioryear tax adjustments generally result settlement audit issues taxing authorities reevaluation company tax liabilities result new developments also adjustments required effect changes statutory tax rates deferred income taxes favorable us income tax adjustments 142 million canadian tax settlement 10 million benefited 1997 earnings 1996 earnings benefited 52 million us federal tax audit settlement environmental remediation provisions pertain estimated future costs environmental cleanup programs certain companys service stations marketing terminals refineries chemical locations oil gas properties divested operations chevron liability future cleanup costs sites commonly referred superfund sites company designated prp epa provisions future environmental remediation costs amounted 35 million 1997 54 million 1996 90 million 1995 restructurings reorganizations 1997 included 54 million chevrons share charge taken affiliate ngc primarily asset write downs costs associated planned restructuring ngcs gas liquids crude oil business 6 million connection reorganization chevrons north american exploration production operations restructurings 1996 resulted charges 14 million various employee severance programs charges 1995 50 million including 12 million related restructurings chevrons caltex affiliate consisted primarily employee severance provisions connection reorganizations various business activities lifo inventory liquidation gains losses result reduction inventories certain inventory pools valued lastin first lifo accounting method amounts include companys equity share caltex lifo inventory effects chevrons consolidated petroleum inventories 79 million barrels yearend 1997 83 million barrels yearend 1996 93 million barrels yearend 1995 special items 1997 reduced earnings 83 million consisted primarily net charges litigation matters including costs associated companys employee performance stock option program earnings reduced net 78 million 1996 consisting primarily litigation matters offset partially 12 million refund federal lease costs 1995 special items benefited earnings net 84 million gain 86 mil fs6 lion related sale land caltex affiliate japan refund 27 million federal lease costs offset partially litigation costs 29 million results operations 1997 company performed well operationally achieved record earnings second consecutive year successful 1997 performance led us refining marketing transportation doubled operating earnings compared last year benefiting increased refined products demand improved sales margins reflecting lower crude costs lower operating expenses international refining marketing transportation earnings also increased significantly 1997 higher earnings primarily attributable chevrons 50 percent share caltex affiliates earnings reflected significant aftertax currency gains asian currencies generally weakened us dollar despite 7 percent decline crude oil prices compared 1996 upstream operating earnings less 4 percent 1996 levels international upstream exceeded last years record profits increased liquids production 4 percent marking eighth consecutive year increased production overall production increase lower operating expenses nearly offset decline crude oil prices net proved reserves increased despite higher production levels 1997 reflecting companys success growing international operations maintaining production levels united states 1997 company estimates replaced 115 percent worldwide oil gas production additions proved reserves excluding effects properties purchased sold 1997 companys reserves replacement rate 142 percent outside united states replacement oil gas production angola australia nigeria indonesia offset areas canada united kingdom kazakhstan production sales producing interests exceeded reserve replacements united states company replaced 100 percent oil gas production 1997 excluding effects properties purchased sold 1997 us operations replaced 120 percent production highest rate since 1984 sales operating revenues 406 billion 1997 compared 428 billion 1996 363 billion 1995 1997 revenues declined lower crude oil refined products prices lower us natural gas production factors mitigated partially increased refined products sales volumes higher natural gas prices revenues improved 1996 compared 1995 primarily higher prices sales volumes crude oil natural gas higher prices refined products partially offset lower refined products sales volumes chemicals prices purchased crude oil products costs 11 percent lower 1997 compared 1996 lower crude oil refined products chemicals feedstock prices sharply higher crude oil natural gas refined products prices accounted 27 percent increase purchased crude oil products costs 1996 compared 1995 income amounted 679 million 1997 344 million 1996 219 million 1995 years included net gains resulting disposition assets caused income fluctuate year operating selling administrative expenses excluding effects special items declined 6 percent 1997 6549 million 6947 million 1996 reduction operational expenses 1997 due lower fuel transportation marketing costs partially offset cost start expansion chemicals facilities operational expenses increased slightly 1996 compared 1995 largely higher fuel transportation costs accruals performancebased employee compensation costs offset continued reductions expenses operating expenses 1995 affected adversely scheduled unscheduled refinery shutdowns maintenance depreciation depletion amortization expense increased 2300 million 1997 2216 million 1996 result higher liquids production levels sfas 121 impairment writedowns us oil gas properties offset partially lower expense reassessment extension useful lives certain us chemicals assets expense declined 1996 3381 million 1995 included approximately 1 billion additional expense implementation sfas 121 taxes income 2246 million 1997 2133 million 1996 859 million 1995 reflecting effective income tax rates 41 percent 45 percent 48 percent three years respectively lower tax rate 1997 compared 1996 primarily reflects shift international earnings mix higher taxrate countries lower taxrate countries shifts foreign earnings us earnings lower tax rate 1996 compared 1995 reflects shift international earnings mix higher taxrate countries lower taxrate countries favorable swing prioryear tax adjustments effects offset partially decrease proportion equity earnings recorded aftertax basis foreign currency effects increased net income 246 million 1997 decreased net income 26 million 15 million 1996 1995 respectively include companys share affiliates foreign currency effects foreign currency gains 1997 primarily occurred australia asian operating areas caltex currencies generally weakened us dollar largest currency impact korea mostly result local net deferred tax benefits local currency losses us dollar fs7 denominated liabilities loss foreign currency effects 1996 resulted fluctuations value united kingdom australian currencies relative us dollar 1995 loss related fluctuations value canadian nigerian currencies effective october 1 1997 caltex management changed functional currency korean japanese equity affiliates local currencies us dollar based significantly changed economic facts circumstances previously korean petroleum industry operated regulated environment domestic prices determined specific korean based return equity 1997 pricing petroleum products moving toward marketbased return trend accelerated fourth quarter 1997 severe devaluation resulted higher local currency costs us dollarbased crude oil raw materials addition period caltexs korean affiliate significantly increased us dollarbased export sales moving net importer refined products net exporter 1997 japan also experienced evolving deregulation petroleum industry material korean operations caltex management decided change functional currency japanese equity affiliate us dollar effective date korean change local currency functional currency caltexs total reported foreign currency losses 62 million first nine months 1997 korean japanese affiliates compared foreign currency losses 46 million full year 1996 change functional currency us dollar caltex reported foreign currency gains 167 million full year 1997 operations korea japan prior change functional currency losses translation us dollardenominated debt local currency offset partially tax benefit resulting deductibility losses local tax purposes change us dollar functional currency translation us dollardenominated debt generate us dollar exchange losses however deductibility local currency losses arising debt continues provide tax benefits translated us dollar income us exploration production earnings excluding special items declined 12 percent record earnings 1996 76 percent 1995 levels earnings decline 1997 relative 1996 result lower crude oil prices lower natural gas production higher exploration expenses earnings 1996 doubled 1995 levels due higher crude oil natural gas prices offset lower liquids production net liquids production 1997 averaged 343000 barrels per day slightly 341000 barrels per day 1996 2 percent 350000 barrels per day 1995 net natural gas production 1997 averaged 185 billion cubic feet per day compared 188 billion cubic feet per day 1996 187 billion cubic feet per day 1995 production declines since 1995 resulted producing property sales normal field declines partially offset new production company several major longterm projects way primarily gulf mexico help mitigate decline us oil gas production volumes companys average crude oil realizations 1768 per barrel 112 lower 1880 averaged 1996 234 1534 per barrel averaged 1995 realizations remained steady 1500 1600 per barrel 1995 1996 chevrons crude oil realizations increased steadily year reaching average 2193 december declined early 1997 1700 april realizations fluctuated around level december 1997 dropped 1566 per barrel continued decline early 1998 fs8 companys average natural gas prices 242 per thousand cubic feet 1997 14 cents 228 1996 91 cents 1995 average 151 steady demand low inventories caused tight supplies buoyed prices 1997 warmer winter weather softened demand early 1998 exploration expenses higher 1997 either 1996 1995 due increased exploration activity gulf mexico company evaluates many prospects depreciation expense increased 13 percent 1997 compared 1996 primarily result higher impairment writeoffs declined 44 percent 1995 levels implementation sfas 121 first required significant asset writeoffs international exploration production record earnings second consecutive year strong earnings 1997 primarily reflected higher crude oil sales volumes offset decline crude prices 1996 higher crude oil natural gas sales volumes higher crude oil prices accounted 41 percent increase operating earnings compared 1995 international exploration production operations including production equity affiliates increased net liquids production 4 percent 731000 barrels per day 1997 eighth consecutive year production increases reflecting companys successful strategy growing international operations kazakhstan nigeria congo principal sources increase 1996 net liquids production increased 8 percent 1995 702000 barrels per day production growth angola nigeria kazakhstan new production congo accounted increase net natural gas production declined 1 percent 1997 576 million cubic feet per day compared 1996 nearly 2 percent 1995 levels net natural gas production declines 1997 occurred canada kazakhstan united kingdom indonesia partially offsetting declines initial natural gas production nigeria escravos natural gas project began operation 1997 net natural gas production volumes 1996 3 percent 1995 levels companys average international liquids prices including equity affiliates 1797 per barrel 1997 compared 1948 1996 1610 1995 average natural gas prices rose 210 per thousand cubic feet 1997 compared 186 173 1996 1995 respectively fs9 earnings included net foreign currency gains 77 million 1997 losses 27 million 1996 earnings impacts primarily reflected currency rate swings us dollar relative australian dollar british pound 1997 1996 1995 loss 16 million reflected rate swings us dollar canadian nigerian currencies us refining marketing transportation earnings excluding special items 1997 highest since 1988 significant improvement earnings compared 1996 1995 driven higher demand refined products improved sales margins reflecting lower crude oil costs lower operating expenses 1997 operating earnings double 1996 earnings nearly 9 times 1995 level us downstream results depressed 1996 1995 competitive conditions many companys markets allow full recovery higher crude oil costs increased manufacturing cost californiamandated cleanerburning gasolines market conditions especially difficult late 1996 crude oil prices rose highest level since 1991 however refinery performance 1996 improved 1995 extensive scheduled unscheduled downtime refined products sales volumes increased 6 percent 119 million barrels per day 1997 compared 112 million barrels per day 1996 1995 half increase reflected highervalue gasoline sales volumes 1997 average us refined products sales realizations declined 100 3 percent 2893 per barrel 2994 1996 improved 1995 levels 2619 reflecting trend crude oil prices international refining marketing transportation earnings include international marine operations equity earnings companys caltex petroleum corporation affiliate addition earnings consolidated refining marketing subsidiaries excluding special items earnings 367 million 1997 doubled 1996 earnings 167 million 30 percent 283 million earned 1995 equity earnings caltex 252 million 408 million 294 million 1997 1996 1995 respectively excluding special items companys earnings caltexs activities 247 million 127 million 213 million respectively 1997 1996 1995 higher 1997 operating earnings largely attributable caltex reflected currency gains 177 million asian currencies generally weakened us dollar largest currency impact korea mostly result local net deferred tax benefits currency losses us dollar denominated liabilities partially offsetting caltexs currency gains inventory valuation losses associated recent decline crude oil prices combined higher provisions noncollectibility receivables asia together totaling 50 million chevrons share caltex earnings 1997 also included 5 million favorable lifo adjustments caltex experienced foreign currency losses 24 million 1996 gains 26 million 1995 also 1996 caltex earnings benefited 2 million favorable adjustments carrying value petroleum inventories reflect market values included special gains 279 million related sale interest two japanese refineries 2 million favorable lifo adjustments caltex earnings 1995 benefited 13 million inventory adjustments included net special gains 81 million primarily related land sale caltex affiliate japan results three years reflect generally weak industry conditions held product prices sales margins companys major areas operations chevrons international refined products sales volumes declined 6 percent 1997 886000 barrels per day 944000 barrels per day 1996 969000 barrels per day 1995 primary reason decline 1997 1996 volumes caltexs sale interest two japanese refineries early 1996 total caltex refined products sales volumes excluding transactions chevron decreased 4 percent 115 million barrels per day 1997 compared 120 million barrels per day 1996 133 million barrels per day 1995 overall international refining marketing foreign currency effects resulted gains 169 million 19 million 1997 1995 respectively losses 17 million 1996 chemicals earnings excluding special items 224 million 1997 flat 228 million 1996 57 percent record 1995 results 524 million earnings 1997 benefited reduced depreciation expense result reassessment extension useful lives certain assets benefit offset lower industry prices higher feedstock fuel costs expenses related maintenance expansion activities year industry overcapacity depressed margins styrene paraxylene polystyrene 1997 margins improved benzene ethylene earnings 1996 benefited nonrecurring receipt insurance proceeds cyclical fs10 turn chemicals industry beginning late 1995 caused earnings fall substantially 1996 1997 although sales volumes remained strong 1996 1997 lower prices higher feedstock fuel costs resulted lower margins companys major chemical products compared 1995 coal minerals earnings excluding special items flat 50 million compared 48 million 1996 47 million 1995 higher sales volumes increases affiliate income 1997 offset partially higher operating costs compared 1996 coal earnings depressed 1996 1995 abundance lowcost hydroelectric power western united states resulting low coal demand low prices years sales 1997 approximately 196 million tons 23 percent 16 million tons 1996 15 percent 17 million tons 1995 increase sales primarily due increased demand low customer inventories corporate activities include interest expense interest income cash marketable securities real estate insurance operations corporate center costs corporate net operating charges excluding special items declined 41 million 292 million 1997 result lower interest expense reduced debt levels combined higher interest income lower insurance costs two preceding years corporate net operating charges flat 333 million 1996 330 million 1995 liquidity capital resources cash equivalents marketable securities totaled 1670 billion yearend 1997 slightly 1637 billion yearend 1996 cash provided operating activities 1997 4583 billion compared 5770 billion 1996 4057 billion 1995 despite higher 1997 operating earnings cash operations declined 1996 due lower distributions equity affiliates increased working capital operating requirements distributions companys caltex affiliate high 1996 sale refinery interests 1997 cash operations proceeds asset sales sufficient fund companys capital expenditures dividend payments stockholders stock repurchases also enabled company reduce debt level january 1998 company announced increase quarterly dividend common stock 3 cents share 5 percent 61 cents share raising chevrons annualized dividend rate 244 share companys debt capital lease obligations totaled 6068 billion december 31 1997 626 million 6694 billion yearend 1996 companys shortterm debt consisting primarily commercial paper current portion longterm debt totaled 4362 billion december 31 1997 total shortterm debt 2725 billion reclassified long term debt yearend 1997 increase 925 million yearend 1996 reflecting increase companys committed credit facilities termination dates beyond one year settlement obligations expected require use working capital 1998 company intent ability evidenced committed credit arrangements refinance alongterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate significant debt transactions 1997 included scheduled first quarter maturity 138 million swiss francdenominated 4625 percent debt third quarter early redemption 142 million 975 percent debentures originally due 2017 employee stock ownership plan also retired january 1997 scheduled 50 million 728 percent debt related employee stock ownership plan december 31 1997 chevron 4050 billion committed credit facilities various major banks facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year fs11 end 1997 addition chevron one subsidiaries existing shelf registrations file securities exchange commission together would permit registered offerings 13 billion debt securities companys future debt level dependent primarily capital spending program business outlook company currently expects debt level increase 1998 believes substantial borrowing capacity meet unanticipated cash requirements companys senior debt rated aa standard poors corporation aa2 moodys investors service chevrons us commercial paper rated a1 standard poors prime1 moodys chevrons canadian commercial paper rated r1 middle dominion bond rating service moodys counterparty rating chevron also aa2 ratings denote high quality investmentgrade securities december 1997 chevron announced board directors approved repurchase 2 billion outstanding common stock company plans use repurchased stock employee stock option programs yearend 1997 company purchased 1199300 shares average cost 7649 per share financial ratios current ratio current assets current liabilities yearend two items negatively affect chevrons current ratio neither companys opinion affect liquidity current assets years include inventories valued lifo basis yearend 1997 lower current costs 11 billion also company continually refinances commercial paper yearend 1997 approximately 600 million commercial paper excluding 2725 billion reclassified longterm debt classified current liability although likely remain outstanding indefinitely interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrons interest coverage ratio improved significantly 1997 due higher beforetax income lower interest expense companys debt ratio total debt total debt plus equity decreased 1997 total debt decreased stockholders equity increased year due strong cash flow net income capital exploratory expenditures worldwide capital exploratory expenditures 1997 totaled 5541 billion including companys equity share affiliates expenditures capital exploratory expenditures 4840 billion 1996 4800 billion 1995 expenditures exploration production accounted 64 percent total outlays 1997 compared 62 percent 1996 57 percent 1995 international exploration production spending 53 percent worldwide exploration production expenditures 1997 61 percent 1996 68 percent 1995 reflecting companys efforts slow decline us production continuing focus growth international exploration production activities company projects 1998 capital exploratory expenditures 63 billion including chevrons share spending affiliates 1998 program provides 40 billion exploration production investments 63 percent international projects several longterm development projects gulf mexico account major portion projected 15 billion spent us exploration production refining marketing transportation expenditures estimated 11billion 600 million planned projects united states majority spent marketing projects international downstream capital program focused asiapacific countries companys caltex affiliate upgrading retail marketing system company plans invest 830 million worldwide chemicals business fs12 forwardlooking statements annual report contains forwardlooking statements relating chevrons operations based managements current expectations estimates projections petroleum chemicals industries words expects intends plans projects believes estimates similar expressions used identify forwardlooking statements guarantees future performance involve certain risks uncertainties assumptions difficult predict therefore actual outcomes results may differ materially expressed forecast forwardlooking statements among factors could cause actual results differ materially crude oil natural gas prices refining margins marketing margins chemicals prices competitive conditions affecting supply demand companys aromatics olefins additives products inability companys joint venture partners fund share operations development activities potential failure achieve expected production existing future oil gas development projects potential disruption interruption companys production manufacturing facilities due accidents political events potential liability remedial actions existing future environmental regulations potential liability resulting pending future litigation addition statements could affected general domestic international economic political conditions report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements assuring integrity objectivity statements prepared accordance generally accepted accounting principles fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited price waterhouse llp independent accountants selected audit committee approved stockholders management made available price waterhouse llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management skenneth derr smartin r klitten sstephen j crowe chairman board vice president comptroller chief executive officer chief financial officer february 20 1998 fs13 report independent accountants stockholders board directors chevron corporation opinion accompanying consolidated balance sheet related consolidated statements income stockholders equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 1997 1996 results operations cash flows three years period ended december 31 1997 conformity generally accepted accounting principles financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance generally accepted auditing standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion expressed discussed note 3 consolidated financial statements effective october 1 1995 company changed method accounting impairment longlived assets comply provisions statement financial accounting standards 121 price waterhouse llp san francisco california february 20 1998 fs14 fs15 fs16 fs17 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies chevron corporation international company subsidiaries affiliates engages fully integrated petroleum operations chemical operations coal mining united states approximately 90 countries petroleum operations consist exploring developing producing crude oil natural gas transporting crude oil natural gas products pipelines marine vessels motor equipment refining crude oil finished petroleum products marketing crude oil natural gas refined petroleum products chemicals operations include manufacture marketing wide range chemicals industrial uses preparing consolidated financial statements company follows accounting policies accordance generally accepted accounting principles united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature companys operations many countries operates subject changing economic regulatory political conditions also company imports crude oil us refining operations company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends oil gas accounting successful efforts method accounting used oil gas exploration production activities derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs cash flows associated derivatives reported underlying hedged transactions cash flows subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income gains losses derivatives contracts qualify hedges recognized currently income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities inventories crude oil petroleum products chemicals stated cost using last firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment costs development wells related plant equipment including carbon dioxide certain injected materials used enhanced recovery projects mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized exploratory wells costs expensed beginning 1995 longlived assets including proved oil gas properties assessed possible impairment accordance provisions statement financial accounting standards sfas 121 standard occurrence certain events downward revision proved oil gas reserves may trigger review affected assets possible impairment proved oil gas properties company would typically perform review individual field basis impairment amounts recorded incremental depreciation expense period specific event occurred depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitof production method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed major replacements renewals capitalized fs18 environmental expenditures environmental expenditures relate current ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs using currently available technology applying current regulations well companys internal environmental policies future amounts discounted recoveries reimbursements recorded asset receipt reasonably assured currency translation us dollar functional currency companys consolidated operations well substantially operations equity method companies operations gains losses currency transactions currently included income cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely stock compensation company applies accounting principles board apb opinion 25 related interpretations accounting stock options presents note 18 pro forma net income earnings per share data accounting prescribed sfas 123 applied note 2 special items financial information net income affected transactions unrelated necessarily representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net increase decrease net income related tax effects financial information follows excess current cost based average acquisition costs year carrying value inventories lifo method used 1089 1122 917 december 31 1997 1996 1995 respectively note 3 adoption statement financial accounting standards sfas 121 accounting impairment longlived assets longlived assets disposed effective october 1 1995 fs19 company affiliates adopted sfas 121 issued financial accounting standards board adoption standard required noncash charges 1995 net income amounting 659 101 per share related income tax benefits 358 mostly related impairment writedowns us oil gas producing properties note 4 information relating consolidated statement cash flows consolidated statement cash flows excludes following noncash transactions 1997 companys venice louisiana natural gas facilities contributed partnership ngc corporation increase investments advances merger considered non cash transaction primarily resulted contribution properties plant equipment 1996 company merged substantially natural gas liquids natural gas marketing businesses ngc corporation company received cash note shares ngc corporation common stock participating preferred stock exchange contribution net assets ngc cash received included consolidated statement cash flows proceeds asset sales capital lease arrangements 282 1995 recorded additions properties plant equipment cost capital lease obligations noncash transactions occurred years presented include acquisition longterm debt exchange termination capital lease obligation reissuance treasury shares management employee compensation plans changes assets liabilities stockholders equity resulting accounting companys esop minimum pension liability market value adjustments investments amounts transactions material aggregate relation companys financial position major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented certain amounts cash flows 1996 1995 reclassified conform 1997 presentation note 5 stockholders equity retained earnings december 31 1997 1996include 2272 2357 respectively companys share undistributed earnings equity affiliates 1988 company declared dividend distribution one right outstanding share common stock rights exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company right entitles holder purchase stock value equal two times exercise price right person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase opportunity rights expire november 1998 may redeemed company 5 cents per share prior date rights voting dividend rights become exercisable dilutive effect earnings company twenty million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 1997 made rights exercisable december 1997 company announced repurchase program 2 billion companys common stock december 31 1997 company repurchased 1199300 shares cost 92 note 6 financial derivative instruments offbalancesheet risk company utilizes variety derivative instruments financial commoditybased hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity derivative instruments used consist mainly futures contracts traded new york mercantile exchange international petroleum exchange natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated crude oil purchases sales product sales generally forecast occur within 60to 90day period natural gas swaps used primarily hedge firmly committed sales terms swap contracts held yearend 1997 average remaining maturity 51 months gains losses derivative instruments offset recognized concurrently gains losses underlying commodities addition company 1997 1996 entered managed programs using swaps options take advantage perceived opportunities favorable price movements natural gas results programs reflected currently income material 1997 1996 company enters forward exchange contracts generally terms 90 days less hedge fs20 foreign currency exposures primarily anticipated purchase transactions forecast occur within 90 days company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floating rate interest amounts calculated reference agreed notional principal amounts made either semiannually annually recorded monthly interest debt expense december 31 1997 four outstanding contracts remaining terms 11 months eight years concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed various foreign governments wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied companys counterparties derivative instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit principal security obtained support lines credit negotiated contracts financial strength customer considered sufficient fair value fair values derived either quoted market prices available absence present value expected cash flows fair values reflect cash would received paid instruments settled yearend december 31 1997 1996 fair values financial derivative instruments follows longterm debt 1414 1850 estimated fair values 1481 1915 notional principal amounts interest rate swaps totaled 1050 1199 approximate fair values totaling 16 1 notional amounts derivative instruments represent assets liabilities company rather basis settlements contract terms company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 1483 1472 balances 828 727 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities three years one year derivatives contract notional values follows crude oil products futures net contract values 4 57 approximating fair values forward exchange contracts contract values 47 231 approximating fair values gas swap contracts based notional gas volumes approximately 75 78 billion cubic feet negative fair values totaling 2 8 deferred gains losses accrued consolidated balance sheet material note 7 summarized financial data chevron usa inc december 31 1997chevron usa inc chevron corporations principal operating company consisting primarily companys us integrated petroleum operations excluding domestic pipeline operations 1997 operations conducted primarily two divisions chevron usa production company chevron products company prior september 1 1996 chevron usa incs natural gas liquids operations conducted warren petroleum company division natural gas marketing operations conducted chevron usa production company beginning september 1 1996 operations carried 28 percent equity ownership ngc corporation summarized financial information chevron usa inc consolidated subsidiaries presented note 8 litigation company defendant numerous lawsuits including along oil companies actions challenging oil gas royalty severance tax payments based posted prices plaintiffs may seek recover large sometimes unspecified amounts matters may remain unresolved several years practical estimate range possible loss companys litigation matters losses could material respect earnings given period however management opinion resolution lawsuits result significant liability company relation consolidated financial position liquidity oxy usa brought lawsuit capacity successor interest cities service company involved claims damages resulting allegedly improper termination tender offer purchase cities stock 1982 made gulf oil corporation acquired chevron 1984 trial respect claims ended july 1996 judgment company 742 including interest fs21 continues accrue rate 955 percent per year company filed appeal posted bond 15 times amount judgment ultimate outcome matter cannot determined presently certainty company believes errors committed trial court result judgment reversed appeal note 9 summarized financial data chevron transport corporation chevron transport corporation ctc liberian corporation indirect wholly owned subsidiary chevron corporation ctc principal operator chevrons international tanker fleet engaged marine transportation oil refined petroleum products ctcs shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiarys obligations connection certain debt securities ctc deemed issuer accordance securities exchange commissions disclosure requirements summarized financial information ctc consolidated subsidiaries presented information derived financial statements prepared standalone basis conformity generally accepted accounting principles separate financial statements disclosures respect ctc omitted separate financial statements disclosures material investors debt securities deemed issued ctc restrictions ctcs ability pay dividends make loans advances december 31 1997 decrease assets net equity primarily due 1997 assignment interestbearing loan agreement ctcs parent associated return paidin capital note 10 geographic segment data geographic segment distributions companys identifiable assets operating income sales operating revenues summarized following tables identifiable assets business segments include assets associated operations indicated geographic areas including investments affiliates corporate identifiable assets consist primarily cash marketable securities corporate real estate information systems operating income 1995 included asset impairment writedowns 998 connection adoption sfas 121 follows us petroleum 754 us chemicals 20 us coal minerals 97 international petroleum 127 corporate included writedowns 19 sales operating revenues petroleum segments derived production sale crude oil natural gas natural gas liquids refining marketing petroleum products company also obtains revenues transportation trading crude oil refined products chemicals revenues result primarily sale petrochemicals plastic resins lube oil fuel additives coal minerals revenues relate primarily coal sales companys real estate insurance operations worldwide cash management financing activities corporate 1996 company completed sale real estate development assets sales operating revenues following table include sales unaffiliated customers sales transfer products segments sales transfer fs22 products segments geographic areas generally estimated market prices transfers geographic areas presented memo items table equity earnings affiliated companies associated segments affiliates operate sales caltex group ngc corporation included international petroleum united states petroleum segments respectively information caltex tengizchevroil ngc affiliates presented note 12 affiliates either material vertically integrated segments operations note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows december 31 1997 future minimum lease payments operating capital leases follows rental expenses incurred operating leases 1997 1996 1995 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial lease period fair market value time note 12 investments advances chevron owns 50 percent pt caltex pacific indonesia cpi exploration production company operating indonesia caltex petroleum corporation cpc subsidiaries affiliates conducts refining marketing activities asia africa middle east australia new zealand american overseas petroleum limited subsidiary manages certain companys operations indonesia companies subsidiaries affiliates collectively called caltex group tengizchevroil tco joint venture formed develop tengiz korolev oil fields 40year period april 1997 chevron sold 10 percent interest tco fs23 affiliate lukoil russian oil company arco sale reduces chevrons ownership 45 percent investment tco december 31 1997 1996 included deferred payment portion 429 428 respectively 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity portion investment recorded upon formation venture company believed time continues believe payment beyond reasonable doubt given original intent continuing commitment parties realizing full potential venture 40year life chevron owns 28 percent ngc corporation ngc gatherer processor transporter marketer energy products north america united kingdom including natural gas natural gas liquids crude oil electricity market value chevrons shares ngc common stock december 31 1997 679 based quoted market prices investments advances companies accounted using equity method investments accounted cost follows equity earnings companies accounted equity method together dividends similar distributions received equity method companies years 1997 1996 1995 follows effective october 1 1997 caltexs management changed functional currency korean japanese equity affiliates local currencies us dollar based significantly changed economic facts circumstances primarily changing regulatory environments countries caltexs earnings 1997 include significant foreign currency gains mostly related net deferred tax benefits resulting local currency losses translation us dollar debt affiliates companys transactions affiliated companies summarized following table primarily purchase indonesian crude oil cpi sale crude oil products cpcs refining marketing companies sale natural gas ngc purchase natural gas natural gas liquids ngc accounts notes receivable consolidated balance sheet include 145 258 december 31 1997 1996 respectively amounts due affiliated companies accounts payable include 57 39 december 31 1997 1996 respectively amounts due affiliated companies following tables summarize combined financial information caltex group equity method companies together chevrons share amounts shown affiliates 100 percent fs24 note 13 propertiesplant equipment expenses maintenance repairs 738 626 833 1997 1996 1995 respectively note 14 taxes us federal income tax expense reduced 93 77 68 1997 1996 1995 respectively lowincome housing business tax credits 1997 beforetax income including related corporate charges us operations 2054 compared 1631 1996 loss 331 1995 international operations 3448 3109 2120 1997 1996 1995 respectively deferred income tax provisions included costs benefits 304 204 75 related properties plant equipment 1997 1996 1995 respectively benefits recorded 1995 358 related impairment longlived assets 91 related provision expected loss exiting real estate development business companys effective income tax rate varied us statutory federal income tax rate following fs25 company records deferred taxes tax jurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities december 31 1997 1996 deferred taxes classified consolidated balance sheet follows reported deferred tax balances composed following deferred tax liabilities assets companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 4500 december 31 1997 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 196 would payable upon remittance earnings note 15 shortterm debt redeemable longterm obligations consist primarily taxexempt variable rate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company entered interest rate swaps portion short term debt december 31 1997 1996 company swapped notional amounts 1050 floating rate debt fixed rates addition december 311996 company swapped 149 debt classified current maturities longterm debt fixed rate floating rate effect swaps companys interest expense material note 16 longterm debt chevron one wholly owned subsidiaries shelf registrations file securities exchange commission together would permit issuance 1300 debt securities pursuant rule 415 securities act 1933 yearend 1997 company 4050 committed credit facilities banks worldwide 2725 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings agreements based either london interbank offered rate reserve adjusted domestic certificate deposit rate amounts outstanding credit agreements year yearend fs26 december 31 1997 company classified 2725 shortterm debt longterm compared 1800 shortterm debt classified longterm december 31 1996 change results greater amount companys committed credit facilities termination dates beyond one year settlement obligations expected require use working capital 1998 company intent ability refinance debt longterm basis consolidated longterm debt maturing five years december31 1997 follows 1998303 1999121 2000124 2001137 2002148 note 17 employee benefit plans pension plans company defined benefit pension plans employees principal plans provide automatic membership noncontributory basis retirement benefits provided plans based primarily years service average career earnings highest consecutive three years average earnings companys policy fund least minimum necessary satisfy requirements employee retirement income security act net pension credit expense companys pension plans years 1997 1996 1995 consisted settlement gains 1997 1996 1995 related lumpsum payments totaled 29 28 7 respectively charges termination benefits totaled 13 1997 5 1995 charges 1996 december 31 1997 1996 weighted average discount rates long term rates compensation increases used estimating benefit obligations expected rates return plan assets follows pension plans assets consist primarily common stocks bonds cash equivalents interests real estate investment funds funded status companys combined plans december 31 1997 1996 follows net transition assets liabilities generally amortized straightline method 15 years profit sharingsavings plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan charges expense profit sharing part profit sharingsavings plan savings plus plan merged profit sharingsavings plan end 1995 shareholders approval 79 92 99 1997 1996 1995 respectively commencing october 1997 companys savings plus plan contributions funded leveraged esop shares employee stock ownership plan esop december 1989 company established leveraged esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock esop provides partial prefunding companys future commitments profit sharing part plan result annual income tax savings company esop expected satisfy companys obligations profit sharing part plan next seven years allowed aicpa statement position sop 936 company elected continue practices based sop 763 subsequent consensus emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations fs27 company recorded expense esop 53 61 67 1997 1996 1995 respectively including 61 65 68 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 57 53 50 1997 1996 1995 respectively company made contributions esop 55 62 69 1997 1996 1995 respectively satisfy esop debt service excess dividends received esop shares pledged collateral debt shares released suspense account allocated profit sharing accounts plan participants based debt service deemed paid year proportion total current year remaining debt service compensation expense 8 4 1 1997 1996 1995 respectively esop shares december 31 1997 1996 follows management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units beginning awards deferred 1996 stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants charges expense combined management incentive plans excluding expense related ltip stock options discussed note 18 stock options 55 36 45 1997 1996 1995 respectively chevron success sharing january 1995 company established program provides eligible employees annual cash bonus company achieves certain financial safety goals total maximum payout program 8 percent employees annual salary charges program 116 72 1997 1996 respectively expenses accrued program 1995 benefit plans addition providing pension benefits company makes contributions toward certain health care life insurance plans active qualifying retired employees substantially employees united states certain international locations may become eligible coverage benefit plans companys annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonpension postretirement benefits prefunded company paid incurred accumulated postretirement benefit obligation apbo unrecognized gains losses plans recorded consolidated balance sheet follows companys net postretirement benefits expense follows measurement purposes separate health care costtrend rates utilized preage 65 postage 65 retirees 1998 annual rates change assumed 34 percent 92 percent respectively gradually converging average ultimate rate 51 percent 2014 preage 65 postage 65 increase assumed health care cost trend rates 1 percent year would increase aggregate service interest costs year 1997 19 would increase december 31 1997 apbo 122 december 31 1997 weighted average discount rate 70 percent assumed rate compensation increase related measurement life insurance benefit 50 percent note 18 stock options company applies apb opinion 25 related interpretations accounting stock options awarded broadbased employee stock fs28 option plan longterm incentive plan described compensation cost companys stock options determined based fair market value grant dates awards consistent methodology prescribed sfas 123 accounting stockbased compensation companys net income earnings per share 1997 1996 1995 would pro forma amounts indicated effects applying sfas 123 pro forma disclosure indicative future amounts sfas 123 apply awards granted prior 1995 addition certain options vest several years awards future years whose terms conditions may vary anticipated longterm incentive plan stock options granted ltip generally awarded market price date grant exercisable earlier one year later 10 years date grant however portion ltip options granted 1996 terms similar broadbased employee stock options described maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year summary status stock options awarded companys ltip excluding awards granted terms similar broadbased employee stock options 1997 1996 1995 presented weightedaverage fair market value options granted 1997 1996 1995 1764 1418 906 per share respectively fair market value option granted estimated date grant using blackscholes optionpricing model following assumptions 1997 1996 1995 respectively riskfree interest rate 61 64 60 percent dividend yield 28 33 39 percent volatility 152 161 173 percent expected life seven years december 31 1997 8268654 shares option exercise prices ranging 319375 809375 per share following table summarizes information stock options outstanding ltip excluding awards granted terms similar broadbased employee stock options december 31 1997 broadbased employee stock options 1996 company granted eligible employees option 150 shares stock equivalents exercise price 51875 per share addition portion awards granted ltip terms similar broadbased employee stock options issued february 1996 vesting contingent upon one two conditions met december 31 1998 price chevron stock closed 7500 per share three consecutive business days alternatively company highest annual total stockholder return competitor group years 1994 1998 options vested june 1997 share price performance condition met options 7204800 shares including similartermed ltip awards granted 1996 forfeitures options 302500 shares reduced outstanding option shares 6902300 december 31 1996 1997 exercises 4171300 forfeitures 516050 reduced outstanding option shares 2214950 yearend 1997 unexercised options expire march 311999 apb opinion 25 company recorded expenses 125 29 options 1997 1996 respectively fair market value option share date grant sfas no123 estimated 566 using binomial optionpricing model following assumptions riskfree interest rate 51 percent dividend yield 42 percent expected life three years volatility 209 percent 1998 company announced new broadbased employee stock option program granted eligible us dollar payroll employees option varies 100 fs29 300 shares stock dependent employees salary job grade options vest two years company 1 total shareholder return among competitor group years 1994 1998 one year options approximately 4 million shares awarded exercise price 763125 per share options expire february 11 2008 nonus dollar payroll employees depending country operation received stock appreciation rights performance units payable cash note 19 earnings per share february 1997 financial accounting standards board issued sfas 128 earnings per share became effective reporting periods ending december 15 1997 previous standard apb 15 company presented single earnings per share eps amount calculated dividing net income weightedaverage number shares outstanding period provisions sfas 128 company present basic diluted eps basic eps includes effects award salary deferrals invested chevron stock units certain officers employees company diluted eps includes effects deferrals well dilutive effects outstanding stock options awarded ltip broadbased employee stock option program see note 18 stock options purposes comparability priorperiod earningspershare data restated conform sfas 128 following table sets forth computation basic diluted eps options purchase 1731750 shares common stock 809375 per share outstanding yearend included computation diluted eps options exercise price greater average market price common shares options expire october 29 2007 note 20 contingent liabilities commitments us federal income tax california franchise tax liabilities company settled 1987 1991 respectively june 1997 companys caltex affiliate received claim us internal revenue service irs 292 million excise taxes 140 million penalties 16 billion interest irs claim relates crude oil sales japanese customers beginning 1980 caltex challenging claim fully expects prevail caltex believes underlying excise tax claim wrong therefore claim penalties interest wrong caltex claim appeals process next move court february 1998 caltex provided initial letter credit 233 billion irs pursue claim letter credit guaranteed chevron texaco addition yet decided portion claim must paid order proceed court caltex involved irs tax audits claims made settlement open tax years expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination december 31 1997 company subsidiaries direct indirect guarantors contingent liabilities 73 notes affiliated companies 31 notes others company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers financing arrangements aggregate amount required payments various commitments 1998313 1999347 2000289 2001 207 2002176 2003 after752 total payments agreements 243 1997 177 1996 173 1995 company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs fs30 material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemical concerns companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys operations related results carefully considered management evaluating level current future activity countries areas company significant operations include united states canada australia united kingdom congo angola nigeria democratic republic congo papua new guinea china indonesia venezuela companys caltex affiliates significant operations indonesia korea japan australia thailand philippines singapore south africa companys tengizchevroil affiliate operates kazakhstan fs31 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities sfas 69 section provides supplemental information oil gas exploration producing activities company six separate tables iii provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola congo democratic republic congo geographic category includes activities australia united kingdom north sea canada papua new guinea venezuela china countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia 45 percent 50 percent prior april 1997 equity share tengizchevroil tco exploration production partnership operating republic kazakhstan fs32 table iii results operations oil gas producing activities 1 companys results operations oil gas producing activities years 1997 1996 1995 shown following table net income exploration production activities reported page fs8 reflects income taxes computed effective rate basis accordance sfas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest expense excluded results reported table iii net income amounts page fs8 fs33 table iii results operations oil gas producing activities 1 continued fs34 table iii results operations oil gas producing activities 12 continued table iv reserve quantities information companys estimated net proved underground oil gas reserves changes thereto years 1997 1996 1995 shown following table proved reserves estimated companys asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually corporations reserves advisory committee ensure rigorous professional standards reserves definitions prescribed securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change time additional information becomes available proved reserves include additional quantities recoverable beyond term lease contract unless renewal reasonably certain may result extensions currently proved areas application secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves tengizchevroil tco companys affiliate kazakhstan include reserves produced dedicated export system place april 1997 chevron sold 10 percent interest tco reducing ownership 45 percent june 1997 consortium chevron lead 30 percent interest successful bid operate risked service agreement venezuelas block ll652 located northeast section lake maracaibo extensive operating program company plans increase production 115000 barrels per day baseline production rate 10000 barrels per day chevron accounting ll652 oil gas activity recorded 49 million barrels proved crude oil reserves reserve quantities recorded companys boscan service agreement began 1996 fs35 table iv reserve quantities information continued table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements sfas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed sfas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs36 table v standardized measure discounted future net cash flows related proved oil gas reserves continued table vi changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included revisions previous quantity estimates fs37 fs38 caltex group companies combined financial statements december 31 1997 c1 caltex group companies combined financial statements december 31 1997 index page general information c3 c6 independent auditors report c7 combined balance sheet c8 c9 combined statement income c10 combined statement stockholders equity c11 combined statement cash flows c12 notes combined financial statements c13 c24 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc created 1936 two owners produce transport refine market crude oil petroleum products group comprised following companies caltex petroleum corporation company incorporated delaware many subsidiaries affiliates conducts refining transporting marketing activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas subsidiary provides services manages certain exploration production operations indonesia chevron texaco interests necessarily jointly properties brief description companys operations items follow caltex petroleum corporation caltex subsidiaries affiliates caltex operates approximately 60 countries principally africa asia middle east new zealand australia caltex involved aspects downstream business refining distribution shipping storage marketing supply trading operations year end 1997 caltex 7600 employees approximately 3 located united states majority refining certain marketing operations conducted joint ventures caltex equity interests 13 refineries refining capacity 900000 barrels per day caltex continues improve refineries investments designed provide higher yields meet environmental regulations additionally interests two lubricant refineries six asphalt plants 17 lubricating oil blending plants 500 ocean terminals depots caltex also interest fleet vessels owns equity interests numerous pipelines caltex sales crude oil petroleum products 14 million barrels per day 1997 caltex affiliates maintain strong marketing presence network 7900 retail outlets 4600 branded caltex also operates 305 star mart convenience stores significant portion 23 billion caltex plans invest next three years targeted stimulate retail growth continue rollout companys new corporate retail image caltex introduced new corporate retail identity 1996 actively pursuing objective reimaging 3000 branded sites 2000 underperforming stations poor prospects improvement eliminated new caltex star mart convenience stores anchor many highvolume station locations many stations also include new ancillary revenue centers quickservice restaurants auto lube bays brushless car washes 1997 caltex continued refinery upgrade projects philippines korea enhanced role australia affiliates acquisition remaining 50 interest australian petroleum pty limited appl thereby becoming largest oil company australia also continued make inroads emerging countries china vietnam indonesia india selected product markets caltex increased market share thailand acquiring british petroleums retail service station network 47 sites entered independent power producer market japan affiliate addition retail initiatives caltex created specialized business units helping caltex operating companies position larger shares highgrowth markets lubricating oils greases aviation fuels liquefied petroleum gas caltex conducts international crude oil petroleum product logistics trading operations subsidiary singapore caltex also active petrochemical business particularly japan korea c3 caltex group companies general information p caltex pacific indonesia cpi holds production sharing contract central sumatra year 2021 cpi also acts operator sumatra eight petroleum contract areas 33 fields jointly held chevron texaco exploration pursued area comprising 183 million acres production established giant minas duri fields along smaller fields gross production fields operated cpi 1997 765000 barrels per day cpi entitlements sold stockholders use systems sell third parties year end 1997 cpi approximately 6100 employees located indonesia american overseas petroleum limited aopl addition providing services cpi aopl subsidiary amoseas indonesia inc manages selective contract areas texacos chevrons undivided interests indonesia excluding sumatra year end aopl approximately 250 employees 6 located united states economic uncertainties second half 1997 many countries pacific rim experienced major devaluations currencies compared us dollar group significant operations either subsidiary affiliate currency crisis areas indonesia korea philippines thailand malaysia material groups net income cash flows capital operations accounted approximately 84 groups earnings 1997 economies related oil consumption areas involved negatively affected crisis cases normal shortterm trade related financing provided international banks curtailed devaluations five countries resulted significant net exchange gains 211 million 73 million pretax exchange losses offset 284 million net local tax benefits inclusive amounts applicable equity affiliates tax benefits resulted increase amount local currencies required repay debt denominated us dollars tax benefits reflected income statement increased local currency debt amounts change us dollar value debt significant portion tax benefit recorded deferred tax asset realized based future local currency taxable income reported earnings include additional reserves potential bad debts related currency crisis 48 million local currency selling prices petroleum products markets could immediately increased fully recover prior dollar margins significant uncertainties affect group operating results cash flows areas 1998 ability raise local currency selling prices restore dollar marketing margins continued weak regional refining margins reduced demand liquidity concerns relative operating companies customers certain subsidiaries caltex petroleum corporation beginning january 1998 provided shortterm trade financing 500 million fourmonth period korean affiliate support considered temporary group focusing cost management recurring capital investment areas involved impact crisis period operating results expected continue significant group expect material effect consolidated financial position liquidity c4 caltex group companies general information environmental activities groups activities subject various environmental health safety regulations countries operates regulations vary significantly degree scope standards enforcement groups policy comply applicable environmental health safety laws regulations well internal policies group active program ensure environmental standards maintained includes closely monitoring applicable statutory regulatory requirements well enforcement policies countries operates conducting periodic environmental compliance audits environmental guidelines definitions promulgated american petroleum institute provide basis reporting groups expenditures year ended december 31 1997 group including equity share affiliates incurred total costs approximately 160 million including capital costs 98 million nonremediation related operating expenses 62 million major component groups expenditures prevention air pollution december 31 1997 group accrued 110 million various known remediation activities including 88 million relating future cost restoring abandoning existing oil gas properties group provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized however group believes future environmental expenditures materially affect financial position liquidity year 2000 compliance issues groups computer systems software mechanical equipment containing embedded technology impacted year 2000 programming problems older programs may incorrectly interpret date causing systems equipment shut produce erroneous information malfunction group established various teams address issues possible time quantify impact problem operations group evaluations currently underway assess risks compliance issues group facing strategies developed mitigate risks correct various system mechanical problems already identified group also working customers suppliers ensure data interfaces equipment software issues properly identified measures taken protect operations group problems outside organization much cost compliance included planned system equipment upgrades already scheduled underway although certain programs accelerated ensure major problems properly addressed target dates costs classified incremental expenses represent redeployment existing resources time estimates total incremental costs incurred correct issues unavailable however group believes cost compliance issues material effect groups combined financial position results operations liquidity refining synergies 1997 caltex thailand affiliate star petroleum refining company sprc rayong refining company rrc affiliate royal dutch petroleum company signed memorandum understanding pursue operating alliance optimize operations two nearby refineries single economic group significant economic benefits possible arrangement sprc rrc currently evaluating various proposed structures synergies well conducting discussions lenders ensure proper concurrences obtained date discussions still early stages legally binding agreements executed c5 caltex group companies general information supplemental market risk disclosures group uses derivative financial instruments hedging purposes instruments principally include interest rate andor currency swap contracts forward option contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales positions adjusted changes exposures hedged since group hedges portion market risk exposures market risk exposure remains unhedged portion notes financial statements provide data relating derivatives applicable accounting policies debt debtrelated derivatives group exposed interest rate risk shortterm longterm debt variable interest rates approximately 19 billion december 31 1997 effects related net interest rate swaps 04 billion group seeks balance benefit lower cost variable rate debt inherent increased risk expensive less risky fixed rate debt accomplished adjusting mix fixed variable rate debt well use derivative financial instruments principally interest rate swaps based overall interest rate exposure variable rate debt interest rate swaps taken separately december 31 1997 hypothetical 2 change interest rates would materially affect groups combined financial position net income liquidity crude oil petroleum product hedging group hedges portion market risks associated crude oil petroleum product purchases sales group uses established petroleum futures exchanges well overthe counter hedge instruments including futures options swaps derivative products reduce groups exposure price volatility physical markets sensitivity hypothetical 13 change crude oil petroleum product prices would result material loss outstanding derivatives end 1997 terms groups financial position results operations liquidity currencyrelated derivatives group exposed foreign currency exchange risk countries operates hedge adverse changes foreign currency exchange rates us dollar group sometimes enters forward exchange option contracts depending exposure hedged group either purchases sells selected foreign currencies year end 1997 group net local currency purchase contracts approximately 417 million hedge certain specific transactions net exposures including foreign currency denominated debt hypothetical 10 change exchange rates us dollar would result net material change groups operating results cash flows derivatives related underlying hedged positions end 1997 c6 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 1997 1996 related combined statements income stockholders equity cash flows years threeyear period ended december 31 1997 combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance generally accepted auditing standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 1997 1996 results operations cash flows years threeyear period ended december 31 1997 conformity generally accepted accounting principles skpmg peat marwick llp dallas texas february 9 1998 c7 c8 c9 c10 c11 c12 caltex group companies notes combined financial statements note 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex petroleum corporation subsidiaries american overseas petroleum limited subsidiary pt caltex pacific indonesia intercompany transactions balances eliminated subsidiaries include companies owned directly indirectly 50 percent except cases control rest group chevron corporation texaco inc stockholders subsidiary companies 50 common shares group companies group primarily engaged exploring producing refining transporting marketing crude oil petroleum products asiapacific eastofsuez regions groups accounting policies accordance united states generally accepted accounting principles translation foreign currencies us dollar functional currency principal subsidiary affiliate operations effective october 1 1997 group changed functional currency affiliates japan korea local currency us dollar major changes economic facts circumstances including significant reduction regulatory restrictions petroleum products countries supported change functional currency change functional currency applied prospective basis us dollar translated amounts nonmonetary assets liabilities september 30 1997 become historical accounting basis assets liabilities october 1 1997 subsequent periods result change functional currency translation gains losses us dollar denominated assets liabilities affiliates arise groups financial statements periods september 30 1997 83 million cumulative translation adjustments korea japan september 30 1997 recorded prior change remain separate component stockholders equity estimates preparation financial statements conformity generally accepted accounting principles requires estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results may differ estimates shortterm investments highly liquid investments classified available sale maturity three months less purchased considered cash equivalents longer maturities classified marketable securities inventories crude oil petroleum product inventories stated cost primarily determined using lastin firstout lifo method costs include applicable acquisition refining costs duties import taxes freight etc materials supplies stated average cost inventories valued lower cost current market investments advances investments affiliates group ownership interest 20 50 majorityowned investments control rest group accounted equity method groups share earnings losses companies included current results recorded investments reflect underlying equity company investments affiliates carried cost dividends reported income property plant equipment exploration production activities accounted successful efforts method depreciation depletion amortization expenses capitalized costs relating producing properties including intangible development costs determined using unitofproduction method assets depreciated class straightline basis using rates based upon estimated useful life class c13 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued maintenance repairs necessary maintain facilities operating condition charged income incurred additions improvements materially extend life assets capitalized upon disposal assets net gain loss included income derivative financial instruments group uses various derivative financial instruments hedging purposes instruments principally include interest rate andor currency swap contracts forward option contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales prior realized gains losses hedges existing nonmonetary assets included carrying value assets gains losses related qualifying hedges firm commitments anticipated transactions deferred recognized income underlying hedged transaction recognized income derivative instrument ceases hedge related gains losses recognized currently income gains losses derivative contracts qualify hedges recognized currently income accounting contingencies certain conditions may exist date financial statements issued may result loss group resolved one future events occur fail occur assessing contingencies necessarily involves exercise judgment assessing loss contingencies related legal proceedings pending group unasserted claims may result proceedings group evaluates perceived merits legal proceedings unasserted claims well perceived merits amount relief sought expected sought therein assessment contingency indicates probable material liability incurred amount loss estimated liability accrued groups financial statements assessment indicates potentially material liability probable reasonably possible probable cannot estimated nature contingent liability together estimate range possible loss determinable disclosed loss contingencies considered remote generally disclosed unless involve guarantees case nature amount guarantee would disclosed however instances disclosure otherwise required group may disclose contingent liabilities unusual nature judgment management legal counsel may interest stockholders others environmental matters groups environmental policies encompass existing laws country group operates groups internal standards expenditures create future benefits contribute future revenue generation capitalized future remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available undiscounted estimates using data primarily developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realizable reclassifications certain amounts 1996 reclassified conform current years presentation note 2 asset sale effective april 1 1997 caltex trading transport corporation subsidiary group sold 40 interest bahrain refining joint venture bapco plus related assets partner government state bahrain net book value approximately 140 million c14 caltex group companies notes combined financial statements note 3 inventories excess current cost reported value inventory maintained lifo basis approximately 28 million 125 million december 31 1997 1996 respectively periods presented inventory quantities valued lifo basis reduced certain locations inventory reductions net related market valuation adjustments 14 million 1997 decreased net income 5 million 1997 1 million 1995 increased net income 4 million 1996 certain inventories recorded market lower lifo carrying value adjustments market reduced earnings 36 million earnings increased 29 million 1996 25 million 1995 due recovery market values previous years writedowns note 4 equity affiliates investments affiliates equity include following carrying value groups investment affiliates excess proportionate share affiliate net equity amortized approximately 20 years 1995 caltex australia limited cal subsidiary group combined petroleum refining marketing operations ampol limited form australian petroleum pty limited appl owns manages combined refining marketing operations cal contributed net assets carrying value 419 million 50 equity interest appl gain loss recognized december 31 1997 cal acquired remaining 50 appl partner subsidiary pioneer international limited approximately 186 million cash plus issuance additional 90 million shares cal stock result transaction groups equity cal declined 75 50 indirect equity appl increased 50 375 transaction recorded purchase cal classified affiliate individual assets liabilities excluded groups consolidated financial statements 1997 effective april 1 1996 group sold 50 investment nippon petroleum refining company limited nprc partner nippon oil company limited noc approximately 2 billion cash groups net income 1996 includes net aftertax gain approximately 620 million related sale combined statement income includes group product sales noc approximately 05 billion first quarter 1996 21 billion 1995 affiliate sold certain property required local government groups share approximately 171 million resulting gain included groups 1995 net income c15 caltex group companies notes combined financial statements note 4 equity affiliates continued remaining interest star petroleum refining company ltd sprc owned thailand governmental entity provisions sprc shareholders agreement limit groups control provide active participation minority shareholder routine business operating decisions agreement also mandates reduction group ownership minority position year 2000 however likely delayed view current economic difficulties shown summarized financial information affiliates millions dollars cash dividends received affiliates 43 million 89 million 76 million 1997 1996 1995 respectively retained earnings december 31 1997 1996 includes 14 billion 10 billion respectively representing groups share undistributed earnings affiliates equity note 5 shortterm debt short term debt consists primarily demand promissory notes acceptance credits overdrafts current portion longterm debt weighted average interest rates shortterm financing december 31 1997 1996 79 75 respectively unutilized lines credit available shortterm financing totaled 411 million december 31 1997 c16 caltex group companies notes combined financial statements note 6 longterm debt longterm debt related interest rates 1997 1996 consist following aggregate maturities long term debt next five years follows millions dollars 1998 62 included shortterm debt 1999 75 2000 133 2001 379 2002 174 2003 thereafter 9 note 7 operating leases group operating leases involving various marketing assets net rental expense 105 million 92 million 91 million 1997 1996 1995 respectively future net minimum rental commitments operating leases non cancelable terms excess one year follows millions dollars 1998 44 1999 36 2000 32 2001 34 2002 33 2003 thereafter 48 c17 caltex group companies notes combined financial statements note 8 employee benefit plans group various retirement plans generally plans provide defined benefits based final average pay benefit levels vesting terms funding practices vary among plans funded status retirement plans primarily foreign inclusive affiliates equity follows c18 caltex group companies notes combined financial statements note 9 commitments contingencies june 17 1997 caltex petroleum corporation cpc received claim us internal revenue service irs 292 million excise tax along penalties interest bringing total approximately 2 billion irs claim relates crude oil sales japanese customers beginning 1980 prior time cpc directly supplied crude oil japanese customers however 1980 cpc subsidiary also became contractual supplier crude oil irs position additional supplier constituted transfer property thus taxable cpc challenging claim since addition another supplying company taxable event additionally cpc believes claim based overstated value finally cpc disagrees imposition calculation interest penalties cpc believes underlying excise tax claim wrong also believes related claim penalties wrong irs claim interest flawed cpc challenging claim fully expects prevail litigate claim cpc required maintain letter credit amount 23 billion including interest 1998 letter provided irs february 1998 excise taxes unlike income taxes taxpayer required pay portion tax liability gain access courts required cash payment material impact groups financial position liquidity cpc also involved irs tax audits years 19871993 claims asserted irs years opinion management adequate provision made income taxes years either examination subject future examination cpc certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer various lawsuits filed us philippines behalf least 3350 parties either survivors relatives persons allegedly died collision philippine waters december 20 1987 one vessel involved collision carrying cpc products connection contract affreightment although cpc direct indirect ownership operational responsibility either vessel various theories liability alleged cpc major suit filed us louisiana state court mention specific monetary recovery although pleadings contain variety demands various categories compensatory well punitive damages consequently reasonable estimate damages involved sought made time cpc sought preclude plaintiffs pursuing louisiana litigation various federal procedural grounds pursued remedies federal court system without success including denial writ certiorari us supreme court cpc management intends continue contest foregoing litigation vigorously various substantive procedural grounds group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third parties groups opinion impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position liquidity results operations reasonable period time 1996 cpc subsidiary entered contractual commitment period eleven years purchase petroleum products conjunction financing refinery owned affiliate total future estimated commitments billions dollars cpc similar contracts based current pricing projected growth rates 1998 07 1999 08 2000 08 2001 08 2002 07 2003 expiration contracts 36 purchases billions dollars similar contracts 10 08 05 1997 1996 1995 respectively c19 caltex group companies notes combined financial statements note 9 commitments contingencies continued cpc contingently liable sponsor support funding construction completion maximum 192 million postcompletion loan repayments maximum 304 million connection affiliates project finance obligations project operational construction completion defined includes achieving extended continuous operation satisfying certain financial conditions contractually must met resolved june 30 1998 postcompletion support declines progressively related longterm loans repaid final payment due 2010 december 31 1997 calls made lenders either type sponsor support however cpc provided shortterm extended trade credit related crude oil supply approximately 144 million affiliate december 31 1997 discussions ongoing lenders group anticipates sponsor support required including replacing existing extended trade credit however group believes support material impact combined financial position liquidity results operations reasonable period time note 10 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk groups outstanding commitments interest rate swaps foreign currency contractual amounts group enters interest rate swaps managing interest risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities eight years unrealized gains losses contracts outstanding yearend 1997 1996 material group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments contracts purchase foreign currencies principally australian singapore dollars hedging existing liabilities maturities four years unrealized gains losses applicable outstanding forward exchange contracts december 31 1997 1996 material group hedges portion market risks associated crude oil petroleum product purchases sales established petroleum futures exchanges used well overthe counter hedge instruments including futures options swaps derivative products reduce groups exposure price volatility physical markets derivative positions markedtomarket valuation purposes gains losses hedges deferred recognized concurrently underlying commodity transactions derivative gains losses considered hedge recognized currently income open positions related unrealized gains losses commoditybased derivative hedging contracts outstanding december 1997 1996 material groups longterm debt 770 million 713 million december 31 1997 1996 respectively fair values 731 million 756 million december 31 1997 1996 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents marketable securities notes accounts receivable current liabilities approximate fair value short maturities c20 caltex group companies notes combined financial statements note 10 financial instruments continued group investments debt securities availableforsale amortized costs 82 million 116 million december 31 1997 1996 respectively fair value securities december 31 1997 1996 approximates amortized costs december 31 1997 1996 investments debt securities availableforsale maturities less ten years december 31 1997 1996 groups carrying amount investments affiliates accounted equity included 12 million 25 million respectively tax unrealized net gains investments held companies group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentration risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer considered sufficient credit losses historically within managements expectations note 11 taxes charged income consist following c21 caltex group companies notes combined financial statements note 11 taxes continued income taxes computed individual company basis rates effect various countries operation effective tax rate differs expected tax rate us federal corporate tax rate follows deferred income taxes provided tax jurisdiction temporary differences financial reporting tax basis assets liabilities valuation allowance established adjust recorded deferred tax assets amounts likely recoverable temporary differences tax loss carryforwards give rise deferred tax liabilities assets follows c22 caltex group companies notes combined financial statements note 11 taxes continued deferred taxes classified combined balance sheet current assets 29 million noncurrent liabilities 190 million december 31 1997 current assets 10 million noncurrent liabilities 249 million december 31 1996 undistributed earnings subsidiaries affiliates us deferred income tax provision made approximated 34 billion december 31 1997 30 billion december 31 1996 earnings intended indefinitely reinvested become taxable us upon remittance dividends practical estimate amount tax may payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability note 12 combined statement cash flows changes operating working capital consist following net cash provided operating activities includes following cash payments interest income taxes deconsolidation caltex australia limited december 31 1997 described note 4 results noncash reduction following combined balance sheet captions included combined statement cash flows net working capital 60 equity affiliates 94 longterm debt 45 minority interest 109 c23 caltex group companies notes combined financial statements note 12 combined statement cash flows continued 1995 caltex australia limited exchanged noncash investing transaction petroleum refining marketing net assets 419 million investment australian petroleum pty limited affiliate group significant noncash investing financing transactions occurred 1996 net cash provided operating activities 1996 includes income tax payments relating sale investment affiliate proceeds sale included net cash provided investing activities note 13 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures affiliates equity accordingly disclosures presented herein c24item 14 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements pages report independent accountants fs12 consolidated statement income three years ended december 31 2000 fs12 consolidated statement comprehensive income three years ended december 31 2000 fs12 consolidated balance sheet december 31 2000 1999 fs13 consolidated statement cash flows three years ended december 31 2000 fs14 consolidated statement stockholders equity three years ended december 31 2000 fs15 notes consolidated financial statements fs16 fs32 2 financial statement schedules included page 25 annual report form 10k financial statement schedule ii valuation qualifying accounts combined financial statements caltex group companies filed part report caltex group companies combined financial statements c1 c20 schedules caltex group omitted applicable required information included combined financial statements notes thereto 3 exhibits exhibit index pages 27 28 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k filed company december 21 2000 report chevron announced change certifying accountant chevron profit sharingsavings plan 2 current report form 8k filed company march 15 2001 report chevron filed companys 2000 audited financial statements managements discussion analysis financial condition results operations 2000 supplementary data signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day march 2000 chevron corporation david j oreilly david j oreilly chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day march 2001 principal executive officers directors david j oreilly samuel h armacost david j oreilly chairman board samuel h armacost richard h matzke sam ginn richard h matzke vicechairman board sam ginn carla hills carla hills j bennett johnston j bennett johnston charles pigott principal financial officer charles pigott john watson frank shrontz john watson vicepresident finance frank shrontz chief financial officer carl ware principal accounting officer carl ware stephen j crowe john young stephen j crowe vicepresident john young comptroller lydia beebe lydia beebe attorneyinfact exhibit index exhibit description 31 restated certificate incorporation chevron corporation dated november 23 1998 filed exhibit 31 chevron corporations annual report form 10k 1998 dated march 31 1999 incorporated reference herein 32 bylaws chevron corporation amended november 23 1998 filed exhibit 32 chevron corporations annual report form 10k 1998 dated march 31 1999 incorporated reference herein 41 rights agreement dated november 23 1998 chevron corporation chasemellon shareholder services llc rights agent filed exhibit 41 chevron corporations current report form 8k dated november 23 1998 incorporated herein reference 42 amendment 1 rights agreement dated october 15 2000 chevron corporation chasemellon shareholder services llc rights agent filed exhibit 42 chevron corporations registration statement form 8a dated december 7 2000 incorporated herein reference pursuant instructions exhibits certain instruments defining rights holders longterm debt securities corporation consolidated subsidiaries filed total amount securities authorized instrument exceed 10 percent total assets corporation subsidiaries consolidated basis copy instrument furnished commission upon request 101 chevron corporation deferred compensation plan directors amended restated effective january 1 2001 102 management incentive plan chevron corporation amended restated effective october 30 1996 filed appendix b chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 103 chevron corporation excess benefit plan amended restated july 1 1996 filed exhibit 10 chevron corporations report form 10q quarterly period ended march 31 1997 incorporated herein reference 104 chevron restricted stock plan nonemployee directors amended restated effective april 30 1997 filed appendix chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 105 chevron corporation longterm incentive plan amended restated effective october 30 1996 filed appendix c chevron corporations notice annual meeting stockholders proxy statement dated march 21 1997 incorporated herein reference 106 chevron corporation salary deferral plan management employees effective january 1 1997 filed exhibit 10 chevron corporations report form 10q quarterly period ended june 30 1997 incorporated herein reference 107 agreement plan merger dated october 15 2000 among texaco inc chevron corporation keepep inc filed exhibit 21 current report form 8k filed company october 16 2000 amended current report form 8k filed company october 16 2000 108 stock option agreement dated october 15 2000 chevron corporation texaco inc filed exhibit 22 current report form 8k filed company october 16 2000 amended current report form 8k filed company october 16 2000 109 stock option agreement dated october 15 2000 chevron corporation texaco inc filed exhibit 23 current report form 8k filed company october 16 2000 amended current report form 8k filed company october 16 2000 121 computation ratio earnings fixed charges page e1 211 subsidiaries chevron corporation page e2 231 consent pricewaterhousecoopers llp page e3 232 consent kpmg page e4 241 powers attorney directors certain officers chevron corporation authorizing signing annual report 2412 form 10k behalf 991 definitions selected financial terms page e5 copies exhibits contained herein available fee 2 per document security holder upon written request secretarys department chevron corporation 575 market street san francisco california 94105 index managements discussion analysis consolidated financial statements supplementary data pages managements discussion analysis fs2 fs10 quarterly results stock market data fs11 report management fs11 report independent accountants fs12 consolidated statement income fs12 consolidated statement comprehensive income fs12 consolidated balance sheet fs13 consolidated statement cash flows fs14 consolidated statement stockholders equity fs15 notes consolidated financial statements fs16 fs32 supplemental information oil gas producing activities fs33 fs38 fiveyear financial summary fs39 fs1 managements discussion analysis financial condition results operations 2000 key indicators net income 5185 billion profitable year companys history exploration production operational earnings doubled 45 billion average us crude oil realization increased 69 percent 2720 per barrel average us natural gas realization 87 percent 404 per thousand cubic feet international net liquids production increased 11th consecutive year 4 percent worldwide net oil gas reserve additions exceeded production eighth consecutive year us refining marketing transportation operational earnings doubled higher margins improved plant reliability annual dividends increased 13th consecutive year chevrons record net income 5185 billion 2000 significantly 1999 net income 2070 billion 1998 net income 1339 billion special charges 2000 included asset writedowns environmental remediation reserve additions prioryears tax adjustments litigation costs partially offsetting charges gains equity accounting effect issuance additional common stock companys dynegy equity affiliate asset sales insurance recoveries property damage actuarial calculations companys benefit plans lifo inventory adjustments net special charges 1999 included losses asset writedowns environmental remediation provisions restructuring charges partially offset benefits sale assets lifo inventory gains net favorable adjustments prioryears taxes litigation issues 1998 net special charges included loss provision 637 million litigation substantially pertained lawsuit gulf oil corporation cities service filed 1982 prior chevrongulf merger 1984 included net income foreign currency gains 142 million 2000 losses 38 million 1999 47 million 1998 net income companys individual business segments discussed results operations section environment outlook record earnings chevron 2000 largely result substantial improvement crude oil natural gas prices along higher worldwide oilequivalent production crude oil prices continued upswing 20year lows experienced late 1998 natural gas prices sensitive regional supplydemand balances rose historic highs us spot market late 2000 capitalizing higherprice conditions company increased worldwide oilequivalent production 5 percent including effect volumes produced internationally operating service agreements adjusting effects higher prices chevrons share net production productionsharing contracts variable royalty arrangements average spot price 2000 west texas intermediate wti benchmark crude oil 3034 per barrel nearly 60 percent 1930 per barrel 1999 double 1998 average price average us henry hub spot natural gas price 423 per thousand cubic feet increased 86 percent compared 1999 average 227 twice 1998 level sharp rise crude oil prices primarily result 1999 agreement among certain opec nonopec oil producing countries restrict production well increased demand lower petroleum inventories worldwide higher us natural gas prices reflected strengthened economy sharply increased demand natural gas power generators time north american natural gas producers struggled increase supply maintain inventory levels although highs 2000 crude oil natural gas prices remained strong early 2001 mid february 2001 price wti 30 per barrel henry hub spot natural gas price peaked 1050 per thousand cubic feet late december 2000 fell 600 per thousand cubic feet midfebruary uncertain long price levels continue factors fs2 may affect future price changes include fluctuations crude oil production producing countries unforeseen supply disruptions increases decreases worldwide inventory levels changes demand heating oil natural gas result winter weather conditions electricity generating requirements demand refined products reflecting overall strength world economies high crude oil natural gas prices enhance companys revenues earnings exploration production operations however conditions could adversely affect financial results refining marketing chemicals businesses higher feedstock costs cannot recovered sufficient product price increases chevrons us downstream margins earnings improved substantially 2000 despite higher crude oil feedstock costs fuel expense companys refineries earnings future depend refined products margins chevrons primary us operating areas west coast south southwest safe reliable refining operations internationally caltex operations asiapacific region continued suffer weak refined products margins resulting surplus refining capacity higher feedstock costs highly competitive environment caltex may continue adversely affected conditions throughout 2001 outlook companys chemicals businesses remains uncertain fluctuating feedstock costs depressed demand excess capacity conditions commodity chemicals results early 2000 benefited price increases certain products industry experienced weakening margins second half year company expects conditions continue 2001 company whole 2000 strong operating cash flows continued focus cost control mitigating effect higher operating expenses increased fuel utility costs helped enable 16 percent increase 2001 capital budget 6 billion profitable growth robust capital spending program linked among things companys continued success operating safely achieving excellence stewardship companys global portfolio worldclass capital investment opportunities chevrontexaco merger agreement chevron texaco announced october 2000 agreement combine two companies integrated global energy company upon approval regulatory authorities stockholders companies fulfillment conditions chevron issue 077 common shares share texaco common stock new company chevrontexaco corporation significantly enhanced positions upstream downstream operations global chemicals business growth platform power generation industryleading skills technology innovation synergistic annual savings least 12 billion expected within six nine months merger chevron texaco anticipate us federal trade commission ftc require asset dispositions condition challenging merger scope method dispositions unknown late february companies anticipated divestiture certain us refining marketing transportation businesses would required address market concentration issues mergerrelated fees expenses consisting primarily us securities exchange commission sec filing fees expenses investment bankers attorneys accountants financial printing related charges estimated 125 million companies substantially costs incurred 2001 though yet fully quantified significant costs also incurred merger integrationrelated expenses including elimination duplicate facilities operational realignment severance payments workforce reductions merger agreement provides payment termination fees much 1 billion either party certain circumstances chevron texaco also granted options purchase shares conditions payments termination fees texaco granted chevron option purchase 107 million shares texacos common stock 5371 per share chevron granted texaco option purchase 127 million shares chevrons common stock 8596 per share significant developments key operating highlights events 2000 early 2001 capture profitable growth opportunities included tengiz tengizchevroils tco total gross crude oil production averaged 280000 barrels per day fourth quarter 2000 record exceeding target 260000 barrels per day result processing plant expansion absence turnaround work 2001 average gross production expected 260000 barrels per day considering effect planned shutdowns maintenance operational activities january 2001 chevron closed purchase additional 5 percent share tco bringing companys ownership interest 50 percent result purchase chevron record additional 177 million barrels oilequivalent reserves 2001 caspian pipeline construction pipeline caspian pipeline consortium cpc chevron owns 15 percent interest remains schedule mid2001 startup 900mile pipeline connect tengiz field western kazakhstan black sea port novorossiysk pipeline provide less costly transportation alternative export tcos crude oil production angola chevron made two significant new oil discoveries tomboco lobito deepwater block 14 company operator 31 percent ownership interest development plans two new discoveries early stages tomboco lobito provide potential synergies development two block 14 discoveries benguela belize chadcameroon chevron 25 percent interest partners began development doba oil fields southern chad construction 650mile pipeline fields marine export facilities coast cameroon project expected cost 35 billion develop 20 30year life first production expected 2004 nigeria chevron awarded interests three deepwater oil prospecting licenses opl offshore nigeria chevron 50 percent interest serve operator opl 250 company also awarded 30 percent nonoperating interests opl 214 opl 318 work also continues initiative convert natural gas clean petroleum fuels fs3 significantly reduce amount flared natural gas companys producing operations gastoliquids facility combine technologies sasol limited chevron built adjacent existing operations escravos thailand government thailand approved chevrons plan development north jarmjuree 200squaremile offshore production area located block b832 north jarmjuree fourth production area granted within block b832 also includes tantawan benchamas maliwan fields chevron operator holds 52 percent interest block b832 canada chevron operator 43 percent interest partners began production natural gas two wells fort liard northwest territories combined production expected average 105 million cubic feet per day natural gas byproducts 2001 construction also began mining extraction upgrading facilities athabasca oil sands project chevron 20 percent interest project expected begin production late 2002 reach 155000 barrels bitumen per day peak us gulf mexico two additional fields viosca knoll carbonate trend began producing combined 106 million cubic feet natural gas per day november 2000 chevron largest contiguous leaseholder carbonate trend holding majority interest 54 leases oil gas reserves replacement company added 875 million barrels oilequivalent reserves 2000 152 percent production year including effects sales acquisitions among major additions 130 million barrels tengiz field kazakhstan chad acquisition 175 million barrels total amount result successful discoveries areas included thailand argentina nigeria angola united kingdom us gulf mexico shelf chevron phillips chemical company effective july 1 2000 chevron phillips petroleum company phillips formed chevron phillips chemical company llc cpcc 5050 joint venture combined companies petrochemicals businesses yearend 2000 cpcc total assets 67 billion environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdparty wastedisposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative andor remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2000 910 million consolidated companies included expenditures 212 million environmental capital expenditures 698 million costs associated control abatement hazardous substances pollutants ongoing operations 2001 total worldwide environmental capital expenditures estimated 264 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites following table analyzes annual changes companys beforetax environmental remediation reserves including superfund sites 2000 company recorded additional provisions estimated remediation costs refined products marketing sites chemicals manufacturing facilities various owned previously owned refining facilities provisions superfund law environmental protection agency epa designated chevron potentially responsible party otherwise involved company remediation 315 hazardous waste sites company made expense provisions payments 2000 prior years approximately 223 sites single site expected result material liability company remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposures superfund law provides joint several liability future actions epa regulatory agencies require chevron assume potentially responsible parties costs designated hazardous waste sites expected material effect companys consolidated financial position liquidity remediation reserves yearend 2000 1999 1998 superfund sites 32 million 33 million 44 million respectively likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties amount future costs may material companys results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expen fs4 ditures significant impact companys competitive position relative petroleum chemical companies company maintains additional reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives many costs related environmental issues expense provisions recognized unitofproduction basis amount reserves yearend 2000 15 billion included accumulated depreciation depletion amortization companys consolidated balance sheet companys ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made litigation uncertainties chevron five oil companies filed suit 1995 contesting validity patent granted unocal corporation reformulated gasoline chevron sells california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocals patent valid enforceable assessed damages 575 cents per gallon gasoline produced infringement patent may 2000 federal circuit court denied petition rehearing us court appeals federal circuit filed chevron five defendants case defendant companies petitioned us supreme court august 2000 case heard february 2001 supreme court denied petition review lower courts ruling defendants pursuing legal alternatives unocals patent ruled invalid unocals patent ultimately upheld companys financial exposure includes royalties plus interest production gasoline proved infringed patent result march 2000 ruling company recorded special aftertax charge 62 million majority charge pertained estimated royalty gasoline production early part fouryear period ending december 31 1999 chevron modified manufacturing processes minimize production gasoline allegedly infringed unocals patented formulations subsequently company accruing normal course business future estimated liability potential infringement patent covered trial courts ruling june 2000 chevron paid 227 million unocal 172 million original court judgment california gasoline produced violation unocals patent march july 1996 55 million interest fees unocal obtained additional patents alternate formulations could affect larger share us gasoline production chevron believes additional patents invalid unenforceable however patents ultimately upheld competitive financial effects companys refining marketing operations presently indeterminable could material another issue involving company ongoing public debate concerning petroleum industrys use mtbe potential environmental impact seepage groundwater along oil companies company party lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior disposal release mtbe company parties additional lawsuits claims related use mtbe may filed future costs company related lawsuits claims currently determinable chevron eliminated use mtbe gasoline sells certain areas chevron also receives claims submits claims customers trading partners host governments contractors insurers suppliers company also party numerous lawsuits matters plaintiffs claimants may seek recover large sometimes unspecified amounts others may seek company perform specific activities including remediation alleged damages matters may remain unresolved several years practical estimate range possible loss although losses gains could material earnings given period management believes resolution matters materially affect companys consolidated financial position liquidity yearend 2000 value assets companys main us pension plan exceeded projected pension obligations 657 million excess attributable higher expected returns investment plan assets past several years investment returns decline future insufficient offset increases plans obligations pension expense may increase additional funding may required company operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys related operations results carefully considered management evaluating level current future activity countries areas company significant operations include united states canada australia united kingdom norway republic congo angola nigeria chad equatorial guinea democratic republic congo papua new guinea china thailand venezuela argentina brazil companys caltex affiliates significant operations indonesia korea australia thailand philippines singapore south africa companys tengizchevroil affiliate operates kazakhstan companys dynegy affiliate operations united states canada united kingdom european countries company affiliates continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period fs5 financial instruments company utilizes various derivative instruments principally swaps futures manage exposure price risk stemming integrated petroleum activities instruments commonly used oil gas trading activities involve little complexity see note 9 consolidated financial statements details activity instruments intended hedge physical transactions company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps control systems designed monitor manage financial exposures accordance company policies procedures new accounting standards company adopted financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities fas 133 amended fas 138 accounting certain derivative instruments certain hedging activities amendment fasb statement 133 effective january 1 2001 chevrons limited use derivative instruments described company elected account derivative instruments hedges accordingly upon adoption fair values derivative instruments recorded assets liabilities balance sheet changes fair values instruments beyond normal sales purchases reflected current income company may elect apply hedge accounting different financial statement effects possible future transactions involving derivative instruments significant election would reduce earnings volatility might otherwise result changes fair values recognized current income adoption fas 133 fas 138 significant impact companys results operations financial position september 2000 fasb issued statement 140 accounting transfers servicing financial assets extinguishments liabilities replacement fasb statement 125 fas 140 fas 140 effective transfers occurring march 31 2001 disclosures relating securitization transactions collateral fiscal years ending december 15 2000 fas 140 significant effect chevrons accounting disclosures types transactions scope new standard employee termination benefits restructuring costs 1999 company implemented staff reduction program operating segments across several business functions accrued 220 million tax severance termination benefits approximately 3500 employees affected primarily usbased employee terminations completed june 30 2000 significant adjustments required amounts previously accrued termination benefits approximately 3100 3500 employees payable assets companys us canadian pension plans future savings connected program relate termination relocation usbased employees results operations sales operating revenues 506 billion 2000 compared 354 billion 1999 299 billion 1998 revenues 2000 1999 increased sharply higher prices crude oil natural gas refined products 2000 revenue increase offset partially absence chemicals revenues second half year due july 1 formation chevron phillips joint venture accounted equity method income equity affiliates totaled 750 million 2000 526 million 1999 228 million 1998 changes earnings tengizchevroil caltex primary cause fluctuations years 2000 increases earnings tengizchevroil caltex dynegy offset partially losses chevron phillips joint venture income totaled 787 million 2000 612 million 1999 386 million 1998 fluctuations years result changes net gains asset sales interest income investments purchased crude oil products costs 2000 52 percent higher 1999 94 percent higher 1998 higher prices crude oil natural gas refined products chemicals feedstock prices fell precipitously 1998 begin recover second quarter 1999 offsetting effect higher prices 2000 absence costs result chevron phillips joint venture formation operating selling general administrative expenses excluding effects special items increased 6487 million 6169 million 1999 6251 million 1998 primarily due higher fuel costs mitigating effect absence expenses associated chemicals operations contributed chevron phillips joint venture exploration expenses 564 million 2000 26 million 5 percent higher 1999 86 million 18 percent higher 1998 2000 increased drilling deepwater us gulf mexico led doubling well writeoffs us operations increase offset declines international operations compared 1998 us international well writeoffs 1999 significantly higher depreciation depletion amortization expense 2848 million 2000 compared 2866 million 1999 2320 million 1998 depreciation expense associated asset impairments 2000 138 million compared 394 million 1999 100 million 1998 increased production crude oil natural gas 2000 1999 resulted higher depreciation expense companys worldwide upstream operations overall 2000 expense reflects lower depreciation chemicals resulting chevron phillips joint venture formation operations income tax expenses 4085 million 2000 1578 million 1999 495 million 1998 reflecting effective income tax rates 44 percent 43 percent 27 percent three years respectively increase 2000 effective tax rate primarily result lower fs6 aftertax earnings equity affiliates proportion beforetax income absence tax benefits attributable 1999 utilization capital losses decline us tax credits proportion beforetax income partially offsetting factors 2000 lower foreign income taxes percentage income reduction impact prior year tax adjustments increase 1999 effective tax rate compared 1998 reflected higher proportion earnings international operations taxed higher rates lower beneficial impact priorperiod tax adjustments settlement outstanding issues permanent differences 1999 lower tax credits proportion beforetax income factors offset slightly effect lower taxes taxable income received equity affiliates 1999 foreign currency gains 2000 142 million compared losses 38 million 1999 47 million 1998 2000 us dollar strengthened currencies number countries particularly australia united kingdom norway canada certain countries caltex operating area weakening late year 1999 companys foreign exchange losses occurred primarily companys operations canada australia australian operations caltex significant losses 1998 caltexs operations korea thailand japan us exploration production earnings 2000 1999 excluding special items driven sustained increases crude oil natural gas prices began early 1999 expenses higher 2000 primarily well writeoffs productionrelated taxes operating expenses largely associated higher fuel costs gains asset sales lower 1999 1998 companys average 2000 us crude oil realization 2720 per barrel 1109 higher 1999 1578 higher 1998 2000 average us natural gas realization 404 per thousand cubic feet 188 higher 1999 double prices 1998 net liquids production year averaged 312000 barrels per day 1 percent 1999 4 percent 1998 net natural gas production 2000 averaged 1558 billion cubic feet per day 5 percent 1999 10 percent 1998 lower oilequivalent production reflected normal field declines asset sales partially offset new enhanced production gulf mexico deep water areas gulf decline us production 2000 mitigated accelerating capital spending fastpayout well workovers development drilling projects increased production took advantage favorable price environment international exploration production earnings excluding special items improved 2000 1999 higher crude oil natural gas prices steadily increasing production chevrons average liquids realization including equity affiliates 2712 per barrel 2000 compared 1731 per barrel 1999 1177 per barrel 1998 average natural gas realization 245 per thousand cubic feet 2000 compared 187 1999 194 1998 fs7 net liquids production 847000 barrels per day 2000 increased 4 percent 811000 barrels per day 1999 8 percent 1998 production increases argentina angola australia thailand 2000 offset lower volumes indonesia colombia 1999 increases angola kazakhstan combined production properties acquired argentina thailand offset declines australia indonesia nigeria net natural gas production 911 million cubic feet 2000 4 percent 1999 nearly 40 percent 1998 2000 production increases primarily argentina thailand partially offset sharply lower production canada due primarily normal declines mature fields increases 1999 britannia field united kingdom well new production properties acquired thailand argentina 11 consecutive years 2000 international production volumes proved reserve quantities increased reflecting companys strategy expanding international upstream operations oilequivalent production 2000 increased 9 percent including volumes produced various international operating service agreements adjusting effects higher prices chevrons share net production productionsharing contracts variable royalty arrangements yearend oilequivalent reserves higher yearend 1999 8 percent us refining marketing transportation earnings excluding special items doubled 2000 778 million exceeded 1998 earnings 633 million 23 percent special items 2000 included environmental remediation provisions certain companys refining marketing sites sold closed prior years earnings improved 2000 higher margins reliable west coast refinery operations earnings 1999 suffered lower sales margins operational problems companys california refineries including fire months later detonation result fire richmond refinery incidents affected capacity efficiency produce blending components diesel fuel jet fuel gasoline effects 1999 offset partially increases refined products sales volumes higher proceeds business interruption insurance refined products sales volumes 1327 million barrels per day 2000 increased 2 percent 1999 volumes 7 percent 1998 levels 2000 sales volumes reflected increases higher value gasoline jet fuel volumes offsetting decline sales residual fuel oil additionally sales 2000 suffered effect 1999 yearend stockpiling customers anticipation possible year 2000related interruptions us refined products sales realizations 3932 per barrel 46 percent 1999 realizations 2686 76 percent 1998s depressed levels international refining marketing transportation earnings include results companys consolidated canadian refining marketing business international marine operations international supply trading activities equity earnings caltex corporation excluding special items 2000 earnings 116 million improved 49 million 1999 6 percent lower 123 million recorded 1998 earnings benefited foreign exchange gains 74 million 2000 compared losses 21 million 1999 69 million 1998 caltex component segment results years 1998 2000 shown table earnings caltex suffered competitive operating environment including excess refinery capacity asiapacific region 2000 1999 weak sales margins areas operations competitive pressures prevented refined products sales realizations rising sufficiently recover higher crude costs international refined products sales volumes 769000 barrels per day 2000 nearly 8 percent 832000 barrels per day 1999 4 percent 798000 barrels per day 1998 lower trading volumes third quarter 1999 sale caltex affiliate primarily responsible decline sales volumes 2000 higher caltex sales volumes primarily responsible 1999 increase fs8 chemicals earnings 2000 included results companys oronite division companys petrochemicals businesses prior contribution cpcc july 2000 equity earnings cpcc second half year special item asset writedowns 2000 affiliates impairment assets puerto rico operationally commodity chemicals businesses suffered second half 2000 generally weak product demand industry additions manufacturing capacity high raw material costs earnings 1999 benefited improved sales margins major products higher sales volumes lower operating expenses 1998 results adversely affected plant shutdowns expansions storm damage repairs consists coal mining operations companys ownership interest dynegy inc worldwide cash management debt financing activities corporate administrative costs insurance operations real estate activities earnings excluding special items companys coal operations 1 million 2000 compared 34 million 1999 77 million 1998 earnings 2000 affected negatively union work stoppage several months year operating geologic complications certain mines 1999 results lower 1998 primarily absence earnings affiliate sold first quarter 1999 lower sales tonnage prices remaining coal business adjustments carrying value operations active negotiation sale time chevrons share dynegy operating earnings 119 million significant increase 44 million 1999 35 million 1998 significantly higher prices natural gas natural gas liquids increase earnings power generation activities primary reasons improved results net charges balance segment excluding special items 245 million 2000 351 million 1999 137 million 1998 lower interest expense higher interest income decreases corporate expenses resulted lower 2000 net charges 1999 primary factors higher level charges 1999 compared 1998 increase debt lower cash balances caused interest expense higher reduced interest income liquidity capital resources cash equivalents marketable securities totaled 26 billion yearend 2000 29 percent 20 billion yearend 1999 cash provided operating activities 2000 87 billion compared 45 billion 1999 37 billion 1998 benefiting higher earnings addition chevron received cash distribution 2000 835 million chevron phillips chemical co joint venture obtained debt financing improved cash flows 2000 permitted company reduce overall debt levels 27 billion repurchase 14 billion companys common shares 1999 1998 debt levels increased 14 billion 15 billion respectively cash provided operating activities asset sales sufficient fund companys total cash requirements 1999 payment 775 million also made occidental petroleum settlement cities service lawsuit 2000 company paid dividends 260 per share compared 248 per share 1999 244 per share 1998 increasing 13th consecutive year january 2001 company declared regular quarterly dividend 65 cents share common stock unchanged previous quarter companys total debt capital lease obligations 6232 billion december 31 2000 decrease 30 percent 8919 billion yearend 1999 early february 2001 company announced public offering repurchase 350 million 745 percent guaranteed notes maturing 2004 close offering late february 230 million acquired yearend 2000 chevron 3250 billion committed credit facilities various major banks 2725 billion termination dates beyond one year facilities support commercial paper borrowing also used general credit requirements borrowings outstanding facilities year yearend 2000 addition chevron three existing shelf registrations file securities exchange commission together would permit registered offerings 28 billion debt securities companys debt due within 12 months consisting primarily commercial paper current portion longterm debt totaled 3804 billion december 31 2000 total shortterm debt 2725 billion reclassified longterm debt yearend 2000 settlement obligations expected require use working capital 2001 company intent ability evidenced committed credit arrangements refinance longterm basis companys practice continually refinance commercial paper maintaining levels believes appropriate fs9 allow chevron continue active relationships institutional investors commercial paper company instituted program 2000 sells commercial paper reinvests borrowed funds moneymarket instruments similar terms december 31 2000 company incremental shortterm debt investments 84 million program companys future debt level dependent primarily results operations capitalspending program company believes substantial borrowing capacity meet unanticipated cash requirements december 1997 chevrons board directors approved repurchase 2 billion companys outstanding common stock use employee stock option programs 2000 prior suspending program october upon announcement merger agreement texaco company repurchased 169 million shares cost 1406 billion total repurchases programs inception 233 million shares cost 1890 billion financial ratios yearend current ratio current assets current liabilities generally two items adversely affect chevrons current ratio companys opinion affect liquidity current assets years included inventories valued lifo basis yearend 2000 lower current costs based average acquisition costs year nearly 2 billion also company benefits lower interest available shortterm debt continually refinancing commercial paper past years chevrons proportionately large amount shortterm debt contributed keeping ratio current assets current liabilities relatively low level however yearend 2000 94 million commercial paper excluding 2725 billion reclassified longterm debt classified current liability strong cash flows 2000 permitted company reduce level commercial paper required fund cash requirements interest coverage ratio defined income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrons interest coverage ratio improved significantly 2000 primarily due higher beforetax income lower interest expense result lower debt levels companys debt ratio total debttotal debt plus equity declined third 238 percent 2000 due significant reduction overall debt balances increase equity year capital exploratory expenditures worldwide capital exploratory expenditures 2000 totaled 5153 billion including companys equity share affiliates expenditures capital exploratory expenditures 6133 billion 1999 5314 billion 1998 expenditures exploration production activities represented 62 percent total outlays 2000 compared 73 percent 1999 59 percent 1998 international exploration production spending 60 percent worldwide exploration production expenditures 2000 compared 80 percent 1999 62 percent 1998 reflecting companys continuing focus international exploration production activities included 1999 expenditures 17 billion mainly cash assumption debt acquisition rutherfordmoran oil corporation petrolera argentina san jorge sa exploration production businesses thailand argentina respectively expenditures 2000 included additional investment 300 million dynegy inc company estimates 2001 capital exploratory expenditures 60 billion including chevrons share spending affiliates 16 percent 2000 spending levels 2001 program provides 37 billion exploration production investments 25 billion international projects major areas emphasis exploration production kazakhstan africa argentina thailand canada deep waters gulf mexico successful implementation planned expenditure program 2001 depend upon many factors including ability partners many projects national petroleum companies producing countries fund shares project expenditures refining marketing expenditures estimated 900 million 600 million planned projects united states spent increase retail volumes convenience store revenue well streamline distribution channels largest portion international refining marketing capital program invested companys caltex affiliate transportation expenditures estimated 500 million primarily international pipelines related expanded upstream production investments power natural gas facilities distribution technology total 650 million invested companys dynegy affiliate company also plans invest 250 million worldwide chemicals business spending plans discussed chevron standalone entity reflect impact pending merger texaco also include acquisition additional 5 percent equity tengizchevroil project kazakhstan closed january 2001 fs10 report management stockholders chevron corporation management chevron responsible preparing accompanying financial statements ensuring integrity objectivity statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based managements best estimates judgments companys statements audited pricewaterhousecoopers llp independent accountants selected audit committee approved stockholders management made available pricewaterhousecoopers llp companys financial records related data well minutes stockholders directors meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance managements authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy companys internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management david j oreilly john watson stephen j crowe david j oreilly john watson stephen j crowe chairman board vice president vice president chief executive officer chief financial officer comptroller february 26 2001 fs11 report independent accountants stockholders board directors chevron corporation opinion consolidated financial statements listed index appearing item 14a1 page 23 present fairly material respects financial position chevron corporation subsidiaries december 31 2000 1999 results operations cash flows three years period ended december 31 2000 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 14a2 page 24 presents fairly material respects information set forth therin read conjunction related consolidated statements financial statements responsibility companys management responsibility express opinion financial statements based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion pricewaterhousecoopers llp san francisco california february 26 2001 fs12 fs13 fs14 fs15 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies chevron corporation manages investments provides administrative financial management support us foreign subsidiaries affiliates engage fully integrated petroleum operations chemicals operations coal mining collectively companies referred chevron operate united states approximately 100 countries petroleum operations consist exploring developing producing crude oil natural gas refining crude oil finished petroleum products marketing crude oil natural gas many products derived petroleum transporting crude oil natural gas petroleum products pipelines marine vessels motor equipment rail car chemicals operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lube oil additives preparing consolidated financial statements company follows accounting policies accordance accounting principles generally accepted united states requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature companys operations many countries operates subject changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method accounting remaining unamortized cost increased decreased companys share earnings losses dividends gains losses arise issuance stock affiliate results changes companys proportionate share dollar amount affiliates equity recognized currently income deferred income taxes provided gains losses derivatives gains losses hedges existing assets liabilities included carrying amounts assets liabilities ultimately recognized income part carrying amounts gains losses related qualifying hedges firm commitments anticipated transactions also deferred recognized income adjustments carrying amounts underlying hedged transaction occurs cash flows associated derivatives reported underlying hedged transactions cash flows subsequent hedged underlying transactions longer likely occur related derivatives gains losses recognized currently income gains losses derivatives contracts qualify hedges recognized currently income adoption january 1 2001 financial accounting standards board fasb statement 133 accounting derivative instruments hedging activities fas 133 fas 138 accounting certain derivative instruments certain hedging activities amendment fasb statement 133 expected significant effect companys results operations consolidated financial position shortterm investments shortterm investments classified available sale highly liquid debt equity securities investments part companys cash management portfolio original maturities three months less reported cash equivalents balance shortterm investments reported marketable securities shortterm investments markedtomarket unrealized gains losses included comprehensive income inventories crude oil petroleum products chemicals stated cost using lastin firstout lifo method aggregate costs market materials supplies inventories generally stated average cost properties plant equipment successful efforts method used oil gas exploration production activities costs development wells related plant equipment proved mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending one following 1 decisions additional major capital expenditures 2 results additional exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed determination cannot made within one year following completion drilling whether proved reserves found exploratory wells costs expensed longlived assets including proved oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows impaired assets written estimated fair values generally discounted cash flows proved oil gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession basis impairment amounts recorded incremental depreciation expense period event occurs depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed fs16 note 1 summary significant accounting policies continued depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements included operating expense sales included income expenditures maintenance repairs minor renewals maintain facilities operating condition expensed incurred major replacements renewals capitalized environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based companys commitment formal plan action approved remediation plan sale disposal asset companys us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end propertys useful life superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes companys portion costs also companys portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs using currently available technology applying current regulations well companys internal environmental policies future amounts discounted recoveries reimbursements recorded asset receipt reasonably ensured currency translation us dollar functional currency companys consolidated operations well substantially operations equity affiliates operations gains losses currency transactions currently included income cumulative translation effects equity affiliates using functional currencies us dollar included currency translation adjustment stockholders equity taxes income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers recognized basis companys net working interest entitlement method stock compensation company applies accounting principles board apb opinion 25 accounting stock issued employees related interpretations accounting stock options presents note 20 pro forma net income earnings per share data accounting prescribed fas 123 accounting stockbased compensation applied note 2 formation chevron phillips chemical company llc effective july 1 2000 chevron phillips petroleum company phillips formed chevron phillips chemical company llc cpcc 5050 joint venture combined petrochemicals businesses chevron phillips chevron accounting interest using equity method accordance accounting principles board apb opinion 18 equity method accounting investments common stock net amount assets liabilities contributed cpcc reclassified investments advances consolidated balance sheet gain loss recognized time contribution transaction represented exchange consolidated business interest private joint venture culmination earnings process difference approximately 100 carrying value investment amount underlying equity cpccs net assets amortized benefit income next 10 years chevrons share cpccs results operations recorded income equity affiliates cpcc limited liability company chevron records provision income taxes related tax liability applicable share cpccs income separately consolidated financial statements equity accounting treatment chevrons share net assets contributed cpcc resulted significant variances 2000 1999 individual line captions appearing financial statements carrying amounts july 1 2000 principal assets liabilities businesses chevron contributed cpcc approximately 600 net working capital 2100 net properties plant equipment 100 investments advances upon formation joint venture obtained debt financing made cash payment 835 owner fs17 note 3 special items financial information net income affected transactions unrelated necessarily representative companys ongoing operations periods presented transactions defined management designated special items obscure underlying results operations year well affect comparability results years listed categories special items net increase decrease net income related tax effects accordance policy company recorded impairments assets held used changes circumstances primarily related lower oil gas prices downward revisions reserves changes use assets indicated carrying values assets could recovered estimated future beforetax undiscounted cash flows asset impairments included asset writeoffs revaluations assets held use except us coal assets held sale approximately one year 1998 1999 late 1999 assets reclassified held use upon cessation negotiations potential buyers aggregate income statement effects special items reflected following table including chevrons proportionate share special items related equity affiliates financial information follows excess current cost based average acquisition costs year carrying value inventories lifo method used 1977 871 584 december 31 2000 1999 1998 respectively december 31 1999 liability 85 remained employee termination benefits relating restructuring charge recorded year 2000 amounts paid employee terminations completed significant adjustments required amounts previously accrued fs18 note 4 cumulative effect net income accounting changes april 1998 american institute certified public accountants aicpa released statement position 985 reporting costs startup activitiessop985 introduced broad definition items expense incurred startup activities including new productsservices entering new territories initiating new processes commencing new operations chevron substantially compliance pronouncement however caltex capitalized types costs certain projects chevron recorded 25 share charge associated caltexs 1998 implementation sop 985 effective january 1 1998 also 1998 chevron changed method calculating certain canadian deferred income taxes effective january 1 1998 benefit change 32 net benefit chevrons 1998 net income cumulative effect adopting sop 985 caltex change chevrons method calculating canadian deferred taxes immaterial note 5 information relating consolidated statement cash flows major components capital expenditures reconciliation amount capital exploratory expenditures excluding equity affiliates presented managements discussion analysis financial condition results operations presented following table consolidated statement cash flows excludes following significant noncash transactions chevron contributed 2800 net noncash assets chevron phillips chemical company llc 2000 described note 2 investment accounted equity method 1999 company acquired rutherfordmoran oil corporation petrolera argentina san jorge sa net cash component transactions included capital expenditures consideration rutherfordmoran transaction included 11 million shares companys treasury stock valued 91 2000 210 reclassified deferred credits noncurrent obligations accrued liabilities payment remitted january 2001 note 6 summarized financial data chevron usa inc december 31 2000 chevron usa inc chevrons principal operating company consisting primarily us integrated petroleum operations excluding domestic pipeline operations first half 2000 operations conducted primarily three divisions chevron usa production company chevron products company chevron chemical company llc described note 2 chevron combined petrochemicals businesses phillips petroleum company july 1 2000 summarized financial information chevron usa inc consolidated subsidiaries presented fs19 note 7 summarized financial data chevron transport corporation limited effective july 1999 chevron transport corporation liberian corporation merged chevron transport corporation limited ctc bermuda corporation assumed assets liabilities chevron transport corporation ctc indirect wholly owned subsidiary chevron corporation ctc principal operator chevrons international tanker fleet engaged marine transportation oil refined petroleum products ctcs shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiarys obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented information derived financial statements prepared standalone basis conformity generally accepted accounting principles 2000 ctcs parent made additional 30 capital contribution restrictions ctcs ability pay dividends make loans advances december 31 2000 note 8 stockholders equity retained earnings december 31 2000 1999 include 2301 2048 respectively companys share undistributed earnings equity affiliates 1998 company declared dividend distribution one right purchase chevron participating preferred stock rights become exercisable unless redeemed earlier company person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result acquiring 10 percent outstanding shares common stock either event occurring without prior consent company chevron series participating preferred stock holder right entitled receive purchase price payable upon exercise chevron right subject adjustment person group acquired 10 percent outstanding shares common stock without prior consent company would entitled purchase october 2000 stockholder rights agreement amended modify 10 percent thresholds discussed 20 percent acquiring person texaco corporation rights expire november 2008 may redeemed company 1 cent per right prior date rights voting dividend rights become exercisable dilutive effect earnings per share company five million shares companys preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 2000 made rights exercisable december 31 2000 30 million shares companys authorized unissued common stock reserved issuance shares longterm incentive plan ltip approved stockholders 1990 date plans common stock requirements met companys treasury stock issuances reserved shares note 9 financial derivative instruments offbalancesheet risk company utilizes variety derivative instruments financial commoditybased hedges manage small portion exposure price volatility stemming integrated petroleum activities relatively straightforward involving little complexity derivative instruments consist mainly futures contracts traded new york mercantile exchange international petroleum exchange crude natural gas swap contracts entered principally major financial institutions futures contracts hedge anticipated crude oil purchases sales product sales generally forecasted occur within 60 90day period crude oil swaps used hedge sales forecasted occur within next three years terms swap contracts maturities period natural gas swaps used primarily hedge firmly committed sales terms swap contracts held yearend 2000 average remaining maturity 43 months gains losses derivative instruments offset recognized income concurrently recognition underlying physical transactions company enters forward exchange contracts generally terms 90 days less hedge foreign currency exposures primarily anticipated purchase transactions forecasted occur within 90 days company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts made semiannually recorded monthly interest debt expense december 31 2000 outstanding contracts fs20 note 9 financial derivative instruments continued concentrations credit risk companys financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables companys shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits companys exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied companys counterparties derivative instruments trade receivable balances reflecting companys diversified sources revenue dispersed among companys broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers letters credit negotiated contracts financial strength customer considered sufficient principal securities obtained support lines credit fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend fair values financial derivative instruments december 31 2000 1999 described longterm debt 2147 2449 estimated fair values 2167 2430 notional principal amount interest rate swap 1999 totaled 350 approximate fair value 11 notional amounts derivative instruments represent assets liabilities company rather basis settlements contract terms company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 2301 1762 balances 1567 1075 classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately three years derivatives contract notional values follows crude oil products futures net contract values 10 143 forward exchange contracts contract values 154 123 gas swap contracts based notional gas volumes approximately 39 44 billion cubic feet crude oil swap contracts based notional crude volumes approximately 11 million barrels fair values derivatives material 2000 1999 deferred gains losses accrued consolidated balance sheet material note 10 operating segments geographic data chevron manages exploration production refining marketing transportation chemicals businesses separately companys primary country operation united states country domicile remainder companys operations reported international outside united states since activities country meet requirements separate disclosure segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed corporation worldwide basis corporate administrative costs assets allocated operating segments instead operating segments billed direct corporate services nonbillable costs remain corporate center expenses aftertax segment operating earnings presented following table fs21 note 10 operating segments geographic data continued segment assets segment assets include intercompany investments intercompany receivables assets consist primarily worldwide cash marketable securities company real estate information systems dynegy inc investment coal mining operations segment assets yearend 2000 1999 follow segment sales operating revenues exploration production segment derived primarily production crude oil natural gas revenues refining marketing transportation segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products prior july 2000 formation chevron phillips joint venture chemicals segment revenues derived manufacture sale petrochemicals plastic resins lube oil fuel additives subsequently revenues manufacture sale lube oil fuel additives included activities include corporate administrative costs worldwide cash management debt financing activities coal mining operations insurance operations real estate activities reportable operating segment sales operating revenues including internal transfers years 2000 1999 1998 presented following table sales transfer products segments estimated market prices fs22 segment income taxes segment income tax expenses years 2000 1999 1998 follows segment information major equity affiliates aligned segment reporting follows pt caltex pacific indonesia cpi tengizchevroil tco international exploration production caltex corporation international refining marketing transportation chevron phillips chemical company llc us chemicals dynegy inc additional information equity affiliates note 13 information related properties plant equipment segment note 14 note 11 litigation chevron five oil companies filed suit 1995 contesting validity patent granted unocal corporation reformulated gasoline chevron sells california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocals patent valid enforceable assessed damages 575 cents per gallon gasoline produced infringement patent may 2000 federal circuit court denied petition rehearing us court appeals federal circuit filed chevron five defendants case defendant companies petitioned us supreme court august 2000 case heard february 2001 supreme court denied petition review lower courts ruling defendants pursuing legal alternatives unocals patent ruled invalid unocals patent ultimately upheld companys financial exposure includes royalties plus interest production gasoline proven infringed patent result march 2000 ruling company recorded special aftertax charge 62 majority charge pertained estimated royalty gasoline production early part fouryear period ending december 31 1999 chevron modified manufacturing processes minimize production gasoline allegedly infringed unocals patented formulations subsequently company accruing normal course business future estimated liability potential infringement patent covered trial courts ruling june 2000 chevron paid 227 unocal 172 original court judgment california gasoline produced violation unocals patent march july 1996 55 interest fees unocal obtained additional patents alternate formulations could affect larger share us gasoline production chevron believes additional patents invalid unenforceable however patents ultimately upheld competitive financial effects companys refining marketing operations presently indeterminable could material note 12 lease commitments certain noncancelable leases classified capital leases leased assets included part properties plant equipment leases classified operating leases capitalized details capitalized leased assets follows rental expenses incurred operating leases 2000 1999 1998 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 1 25 years andor options purchase leased property end initial lease period fair market value time december 31 2000 future minimum lease payments operating capital leases follows fs23 note 13 investments advances chevron owns 50 percent pt caltex pacific indonesia cpi exploration production company operating indonesia caltex corporation subsidiaries affiliates conducts refining marketing activities asia africa middle east australia new zealand american overseas petroleum limited subsidiary manages certain companys operations indonesia companies subsidiaries affiliates collectively called caltex group company received dividends distributions 596 268 254 2000 1999 1998 respectively including 244 212 167 caltex group tengizchevroil tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period chevrons ownership 45 percent 1998 2000 period upon formation joint venture company incurred obligation 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tcos production capacity january 2001 company purchased additional 5 percent tco part transaction company paid 210 420 obligation 420 also included carrying value original investment company believed beyond reasonable doubt full payment would made yearend 2000 chevron owned 265 percent dynegy inc gatherer processor transporter marketer energy products north america united kingdom products include natural gas natural gas liquids crude oil electricity chevrons percentage ownership dynegy reduced 28 percent 2000 result dynegy 10 millionshare equity offering 53 per share chevron participate market value chevrons share dynegy common stock december 31 2000 4784 based closing market prices chevron owns 50 percent chevron phillips chemical company llc formed july 2000 company merged petrochemicals businesses phillips petroleum company business described detail note 2 companys transactions affiliated companies summarized table follows primarily purchase indonesian crude oil cpi sale crude oil products caltex corporations refining marketing companies sale natural gas dynegy purchase natural gas natural gas liquids dynegy equity earnings together investments advances companies accounted using equity method investments accounted cost follows accounts notes receivable consolidated balance sheet include 494 277 december 31 2000 1999 respectively amounts due affiliated companies accounts payable include 139 53 december 31 2000 1999 respectively amounts due affiliated companies fs24 note 14 properties plant equipment fs25 note 15 taxes us federal income tax expense reduced 103 89 84 2000 1999 1998 respectively lowincome housing business tax credits 2000 beforetax income including related corporate charges us operations 3924 compared 1254 1999 728 1998 international operations beforetax income 5346 2394 1106 2000 1999 1998 respectively companys effective income tax rate varied us statutory federal income tax rate following increase 1999 effective tax rate 1998 due primarily increased foreign taxes higher foreign earnings 1999 compared 1998 additional increases effective tax rate 1999 tax credits smaller proportion beforetax income 1999 1998 effects 1999 effective tax rate included settlement outstanding issues utilization additional capital loss benefits permanent differences slightly offset effect lower taxable income received equity affiliates 1999 company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities assets investments 2000 table include deferred tax liabilities 805 investments 482 associated companys investment chevron phillips chemical company 1999 deferred tax liabilities associated companys assets contributed joint venture reported properties plant equipment december 31 2000 1999 deferred taxes classified consolidated balance sheet follows companys policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 5244 december 31 2000 substantially amount represents earnings reinvested part companys ongoing business practical estimate amount taxes might payable eventual remit fs26 tance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability company estimates withholding taxes approximately 226 would payable upon remittance earnings note 16 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt december 31 2000 outstanding contracts december 31 1999 company swapped notional amounts 350 floating rate debt fixed rates effect swaps companys interest expense material note 17 longterm debt chevron three shelf registrations file securities exchange commission together would permit issuance 2800 debt securities pursuant rule 415 securities act 1933 yearend 2000 company 3250 committed credit facilities banks worldwide 2725 termination dates beyond one year facilities support companys commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate reserve adjusted domestic certificate deposit rate bank prime rate amounts outstanding credit agreements year yearend december 31 2000 1999 company classified 2725 shortterm debt longterm settlement obligations expected require use working capital 2001 company intent ability refinance debt longterm basis consolidated longterm debt maturing five years december 31 2000 follows 2001267 2002231 2003182 20041153 200529 early february 2001 company announced public offering repurchase 745 percent guaranteed notes maturing 2004 expiration offering midfebruary 230 acquired fs27 note 18 comprehensive income components changes comprehensive income related tax effects shown note 19 employee benefit plans pension plans company defined benefit pension plans employees provides certain health care life insurance plans active qualifying retired employees companys policy fund minimum necessary satisfy requirements employee retirement income security act companys pension plans companys annual contributions medical dental benefits limited lesser actual medical claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonfunded pension postretirement benefits paid directly incurred accordingly payments reflected changes plan assets following table status companys pension plans postretirement benefit plans 2000 1999 follows fs28 measurement purposes separate health care costtrend rates used preage 65 postage 65 retirees 2001 annual rates change assumed 72 percent 162 percent respectively gradually converging average ultimate rate 50 percent 2021 preage 65 postage 65 onepercentagepoint change assumed health care rates would following effects components net periodic benefit cost 2000 1999 1998 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 416 334 33 respectively december 31 2000 428 368 80 respectively december 31 1999 profit sharingsavings plan eligible employees company certain subsidiaries completed one year service may participate profit sharingsavings plan charges expense profit sharing part profit sharingsavings plan 62 61 60 2000 1999 1998 respectively companys savings plus plan contributions funded leveraged esop shares employee stock ownership plan esop december 1989 company established leveraged esop part profit sharingsavings plan esop trust fund borrowed 1000 purchased 282 million previously unissued shares companys common stock june 1999 esop borrowed 25 698 percent interest using proceeds pay interest due existing esop debt july 1999 companys leveraged esop issued notes 620 average interest rate 742 percent guaranteed chevron corporation debt proceeds paid chevron corporation exchange chevrons assumption existing 811 percent esop longterm debt 620 esop provides partial prefunding companys future commitments profit sharingsavings plan result annual income tax savings company permitted aicpa statement position 936 employers accounting employee stock ownership plans company elected continue practices based statement position 763 accounting practices certain employee stock ownership plans subsequent consensus emerging issues task force financial accounting standards board accordingly debt esop recorded debt shares pledged collateral reported deferred compensation consolidated balance sheet statement stockholders equity company reports compensation expense equal esop debt principal repayments less dividends received esop interest incurred esop debt recorded interest expense dividends paid esop shares reflected reduction retained earnings esop shares considered outstanding earningspershare computations company recorded expense esop 25 59 58 2000 1999 1998 respectively including 47 49 56 interest expense related esop debt dividends paid shares held esop used service esop debt dividends used 54 33 57 2000 1999 1998 respectively company made contributions esop 64 60 1999 1998 respectively satisfy esop debt service excess dividends received esop contributions required 2000 esop shares pledged collateral debt shares released suspense account allocated accounts plan participants based debt service deemed paid fs29 year proportion total current year remaining debt service credit charge compensation expense 22 10 2 2000 1999 1998 respectively esop shares december 31 2000 1999 follows management incentive plans company two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants charges expense combined management incentive plans excluding expense related ltip stock options discussed note 20 49 41 28 2000 1999 1998 respectively chevron success sharing company program provides eligible employees annual cash bonus company achieves certain financial safety goals 2000 total maximum payout program 8 percent employees annual salary charges program 146 47 51 2000 1999 1998 respectively 2000 maximum payout program increased 10 percent note 20 stock options company applies apb opinion 25 related interpretations accounting stock options awarded broadbased employee stock option programs longterm incentive plan described compensation cost companys stock options determined based fair market value grant dates awards consistent methodology prescribed fas 123 companys net income earnings per share 2000 1999 1998 would pro forma amounts shown effects applying fas 123 pro forma disclosure indicative future amounts fas 123 apply awards granted prior 1995 addition certain options vest several years awards future years whose terms conditions may vary anticipated broadbased employee stock options 1996 company granted eligible employees option 150 shares stock equivalents exercise price 51875 per share addition portion awards granted ltip terms similar broadbased employee stock options vested june 1997 chevrons share price closed 7500 three consecutive days options 7204800 shares including similartermed ltip awards granted program 1996 outstanding option shares 2213450 december 31 1997 1998 exercises 1361000 forfeitures 10800 reduced outstanding option shares 841650 yearend 1998 1999 exercises 740725 forfeitures 61850 expirations 39075 reduced outstanding option shares zero march 31 1999 date expiration apb opinion 25 company recorded gains 2 options 1999 gains expenses program recorded 2000 1998 fair market value option share date grant fas 123 estimated 566 using binomial optionpricing model following assumptions riskfree interest rate 51 percent dividend yield 42 percent expected life three years volatility 209 percent 1998 company announced another broadbased employee stock option program granted eligible employees option varied 100 300 shares stock equivalents dependent employees salary job grade options vested two years february 2000 options 4820800 shares awarded exercise price 763125 per share forfeitures options 854550 shares reduced outstanding option shares 3966250 december 31 1999 2000 exercises 611201 forfeitures 290682 reduced outstanding option balance 3064367 end year options expire february 11 2008 apb opinion 25 company recorded expenses 2 4 2 options 2000 1999 1998 respectively fair value option share date grant fas 123 estimated 1908 using average results blackscholes models preceding 10 years 10year averages assumption used blackscholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent fs30 note 20 stock options continued longterm incentive plan stock options granted ltip generally awarded market price date grant exercisable earlier one year later 10 years date grant however portion ltip options granted 1996 terms similar broadbased employee stock options maximum number shares common stock may granted year 1 percent total outstanding shares common stock january 1 year weightedaverage fair market value options granted 2000 1999 1998 2234 2040 2110 per share respectively fair market value option date grant estimated using blackscholes optionpricing model following assumptions 2000 1999 1998 respectively riskfree interest rate 58 55 45 percent dividend yield 30 31 percent volatility 256 201 286 percent expected life seven years december 31 2000 10311802 shares option exercise prices ranging 319375 9975 per share following table summarizes information stock options outstanding ltip excluding awards granted terms similar broadbased employee stock options december 31 2000 summary status stock options awarded companys ltip excluding awards granted terms similar broadbased employee stock options 2000 1999 1998 follows note 21 contingencies commitments us federal income tax liabilities settled 1993 companys california franchise tax liabilities settled 1991 settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination december 31 2000 company subsidiaries direct indirect guarantors contingent liabilities 25 notes affiliated companies 179 notes others company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers financing arrangements aggregate amounts required payments various commitments 2001 375 2002354 2003333 2004310 2005252 2006 after946 total payments agreements 281 2000 258 1999 201 1998 fs31 note 21 contingencies commitments continued company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior disposal release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination companys liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact companys competitive position relative domestic international petroleum chemical concerns company believes material market credit risks operations financial position liquidity result commodities derivatives activities however results operations financial position certain equity affiliates may affected business activities involving use derivative instruments companys operations particularly oil gas exploration production affected changing economic regulatory political environments various countries including united states operates certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees companys continued presence countries internal unrest strained relations host government company governments may affect companys operations developments times significantly affected companys operations related results carefully considered management evaluating level current future activity countries also oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period areas company significant operations include united states canada australia united kingdom norway congo angola nigeria chad equatorial guinea democratic republic congo papua new guinea china venezuela thailand argentina brazil companys caltex affiliates significant operations indonesia korea australia thailand philippines singapore south africa companys tengizchevroil affiliate operates kazakhstan companys dynegy affiliate operations united states canada united kingdom european countries note 22 earnings per share eps basic eps includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects deferrals well dilutive effects outstanding stock options awarded ltip broadbased employee stock option program see note 20 stock options following table sets forth computation basic diluted eps fs32 supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 disclosures oil gas producing activities fas 69 section provides supplemental information oil gas exploration producing activities company six separate tables iii provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables iv vi present information companys estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad congo democratic republic congo geographic category includes activities australia argentina united kingdom north sea canada papua new guinea venezuela brazil china thailand countries amounts shown affiliated companies chevrons 50 percent equity share pt caltex pacific indonesia cpi exploration production company operating indonesia 45 percent equity share tengizchevroil tco exploration production partnership operating republic kazakhstan fs33 table iii results operations oil gas producing activities1 companys results operations oil gas producing activities years 2000 1999 1998 shown following table net income exploration production activities reported page fs7 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs7 fs34 fs35 table iv reserve quantity information companys estimated net proved underground oil gas reserves changes thereto years 2000 1999 1998 shown following table proved reserves estimated company asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually corporations reserves advisory committee ensure rigorous professional standards reserves definitions prescribed us securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves include additional quantities recoverable beyond term lease concession agreement may result extensions currently proved areas applying secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate chevron operates risked service agreement venezuelas block ll652 located northeast section lake maracaibo chevron accounting ll652 oil gas activity december 31 2000 recorded 57 million barrels proved crude oil reserves reserve quantities recorded companys service agreement venezuela boscan field fs36 table v standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent managements estimate companys expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication companys future cash flows value oil gas reserves fs37 changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included revisions previous quantity estimates fs38 fs39 caltex group companies combined financial statements december 31 2000 c1 caltex group companies combined financial statements december 31 2000 index page general information c3 c4 independent auditors report c5 combined statement income c6 combined statement comprehensive income c6 combined balance sheet c7 combined statement stockholders equity c8 combined statement cash flows c9 notes combined financial statements c10 c20 note financial statement schedules omitted permitted rule 403 rule 504 regulation sx c2 caltex group companies general information caltex group companies group jointly owned 50 chevron corporation texaco inc collectively stockholders created 1936 two owners explore produce transport refine market crude oil petroleum products group comprised following companies caltex corporation company incorporated delaware corporate headquarters singapore many subsidiaries affiliates conducts refining transporting trading marketing activities eastern hemisphere p caltex pacific indonesia exploration production company incorporated operating indonesia american overseas petroleum limited company incorporated bahamas brief description companys operations items follows reported amounts us dollars caltex corporation caltex subsidiaries affiliates caltex operates approximately 57 countries principally africa asia middle east new zealand australia geographic areas comprise broad diversity mature developing emerging markets end 2000 total assets 77 billion sales 14 million barrels crude oil petroleum products per day total revenues 184 billion year caltex involved aspects downstream business marketing refining distribution transportation storage supply trading operations corporation also active petrochemical business affiliate korea yearend 2000 caltex 7200 employees majority refining certain marketing operations conducted joint ventures caltex equity interests 10 refineries equity refining capacity approximately 846000 barrels per day additionally interests two lubricant refineries 17 lubricant blending plants network ocean terminals depots caltex also interest fleet vessels owns equity interests numerous pipelines caltex conducts international crude oil petroleum product logistics trading operations subsidiary singapore p caltex pacific indonesia cpi holds production sharing contract psc central sumatra year 2021 cpi also acts operator sumatra eight petroleum contract areas 33 fields jointly held chevron texaco end 2000 cpi total assets 25 billion generated total revenues 20 billion year exploration pursued area comprising 183 million acres production established giant minas duri fields along smaller fields gross production fields operated cpi 2000 707000 barrels crude oil per day cpi entitlements sold stockholders use systems sell third parties yearend 2000 cpi approximately 5800 employees located indonesia american overseas petroleum limited aopl subsidiary amoseas indonesia inc provide services cpi manage certain geothermal steam operations geothermal power generation projects indonesia chevron texaco interests yearend 2000 aopl approximately 186 employees 9 located united states c3 caltex group companies general information supplemental market risk disclosures group uses various derivative financial instruments hedging trading purposes instruments principally include interest rate andor currency swap contracts forward option contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales positions adjusted changes exposures hedged since group hedges portion market risk exposures exposure remains unhedged portion notes combined financial statements provide additional data relating derivatives applicable accounting policies debt debtrelated derivatives group exposed interest rate risk shortterm longterm debt variable interest rates approximately 19 billion 22 billion effects related net interest rate swaps 03 billion 04 billion december 31 2000 1999 respectively group seeks balance benefit lower cost variable rate debt inherent increased risk expensive lower risk fixed rate debt accomplished adjusting mix fixed variable rate debt well use derivative financial instruments principally interest rate swaps based overall interest rate exposure variable rate debt interest rate swaps december 31 2000 1999 hypothetical change interest rates 2 would change net income approximately 23 million 25 million 2000 1999 respectively crude oil petroleum product derivatives group uses established petroleum futures exchanges well overthecounter instruments including futures options swaps derivative products hedge portion market risks associated crude oil petroleum product purchases sales group also enters derivative contracts part crude oil petroleum product trading activities group net open petroleum derivative purchase contracts approximately 146 million 127 million december 31 2000 1999 respectively sensitivity contracts hypothetical 10 change crude oil petroleum product prices would change net income approximately 10 million 9 million 2000 1999 respectively currencyrelated derivatives group exposed foreign currency exchange risk countries operates hedge adverse changes foreign currency exchange rates us dollar group sometimes enters forward exchange options contracts depending exposure hedged group either purchases sells selected foreign currencies group net foreign currency purchase contracts approximately 191 million 279 million december 31 2000 1999 respectively hedge certain specific transactions net exposures including foreign currency denominated debt hypothetical 10 change exchange rates us dollar would result net material change groups operating results cash flows derivatives related underlying hedged positions 2000 1999 new accounting standard statement financial accounting standards 133 sfas 133 accounting derivative instruments hedging activities amended sfas 137 138 adopted group beginning january 1 2001 sfas 133138 require companies record derivatives balance sheet assets liabilities measure derivatives fair value changes fair values derivatives recorded period current earnings comprehensive income depending whether derivative designated part hedge transaction type exposure hedged based current level activity derivative instruments group expect adoption sfas 133138 significant impact results operations comprehensive income financial position c4 independent auditors report stockholders caltex group companies audited accompanying combined balance sheets caltex group companies december 31 2000 1999 related combined statements income comprehensive income stockholders equity cash flows years threeyear period ended december 31 2000 expressed united states america dollars combined financial statements responsibility groups management responsibility express opinion combined financial statements based audits conducted audits accordance auditing standards generally accepted united states america standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion combined financial statements referred present fairly material respects financial position caltex group companies december 31 2000 1999 results operations cash flows years threeyear period ended december 31 2000 conformity accounting principles generally accepted united states america discussed note 2 combined financial statements group changed method accounting startup costs 1998 comply provisions aicpas statement position 985 reporting costs startup activities kpmg singapore february 8 2001 c5 c6 c7 c8 c9 caltex group companies notes combined financial statements note 1 summary significant accounting policies principles combination combined financial statements caltex group companies group include accounts caltex corporation subsidiaries american overseas petroleum limited subsidiary ptcaltex pacific indonesia intercompany transactions balances eliminated subsidiaries include companies owned directly indirectly 50 except cases control rest group groups accounting policies accordance us generally accepted accounting principles groups reporting currency us dollar translation foreign currencies us dollar functional currency principal subsidiary affiliate operations estimates preparation financial statements conformity us generally accepted accounting principles requires estimates assumptions affect reported amounts assets liabilities disclosure contingent assets liabilities date financial statements reported amounts revenues expenses reporting period actual results may differ estimates shortterm investments highly liquid investments classified available sale maturity three months less purchased considered cash equivalents longer maturities classified marketable securities inventories valued lower cost current market except noted crude oil petroleum product inventory costs primarily determined using lastin firstout lifo method include applicable acquisition refining costs duties import taxes freight etc materials supplies stated average cost certain tradingrelated inventory highly transitory nature markedtomarket investments advances investments affiliates group ownership interest 20 50 majorityowned investments control rest group accounted equity method groups share earnings losses companies included current results recorded investments reflect underlying equity company investments affiliates carried cost dividends reported income property plant equipment exploration production activities accounted successful efforts method costs development wells related plant equipment proved mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending one following 1 decisions additional major capital expenditures 2 results additional exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed determination cannot made within one year following completion drilling whether proved reserves found exploratory wells costs expensed longlived assets including proved developed oil gas properties assessed possible impairment comparing carrying values undiscountedfuturenetbeforetax cash flows impaired assets written fair values generally discounted cash flows impaired assets held sale recorded fair value less cost sell proved oil gas properties reviews performed concession basis impairment amounts recorded incremental depreciation expense period event occurs depreciation depletion amortization expenses capitalized costs relating producing properties including intangible development costs determined using unitofproduction method individual fields proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual fields related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed assets depreciated class straightline basis using rates based upon estimated useful life class c10 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued maintenance repairs necessary maintain facilities operating condition charged income incurred additions improvements materially extend life assets capitalized upon disposal assets net gain loss included income deferred credits deferred credits primarily represent indonesian governments interest specific property plant equipment balances production sharing contract psc indonesian government retains majority equity share current production profits intangible development costs idc capitalized us generally accepted accounting principles successful efforts method treated period expenses psc reporting capitalized amounts depreciated accelerated rate psc reporting deferred credit balances recognize governments share idc reported capital costs life psc included income depreciation depletion amortization applied future production related profits derivative financial instruments energy trading contracts group uses various derivative financial instruments hedging purposes instruments include interest rate andor currency swap contracts forward options contracts buy sell foreign currencies commodity futures options swaps derivative instruments hedged market risk exposures include certain portions assets liabilities future commitments anticipated sales prior realized gains losses hedges existing nonmonetary assets included carrying value assets gains losses related qualifying hedges firm commitments anticipated transactions deferred recognized income underlying hedged transaction recognized income derivative instrument ceases hedge related gains losses recognized currently income gains losses derivative instruments qualify hedges recognized currently income group also enters energy contracts part crude oil petroleum product trading activities trading contracts recorded market value related gains losses recorded net basis cost sales operating expenses market values change net gains losses trading contracts material groups results operations 2000 1999 1998 accounting contingencies certain conditions may exist date financial statements issued may result loss group resolved one future events occur fail occur assessing contingencies necessarily involves exercise judgment assessing loss contingencies related legal proceedings pending group unasserted claims may result proceedings group evaluates perceived merits legal proceedings unasserted claims well perceived merits amount relief sought expected sought therein assessment contingency indicates probable material liability incurred amount loss estimated liability accrued groups financial statements assessment indicates potentially material liability probable reasonably possible probable cannot estimated nature contingent liability together estimate range possible loss determinable disclosed loss contingencies considered remote generally disclosed unless involve guarantees case nature amount guarantee would disclosed however instances disclosure otherwise required group may disclose contingent liabilities unusual nature judgment management legal counsel may interest stockholders others environmental matters groups environmental policies encompass existing laws country group operates groups internal standards expenditures create future benefits contribute future revenue generation capitalized future remediation costs accrued based estimates known environmental exposure even uncertainties exist ultimate cost remediation accruals based best available undiscounted estimates using data primarily developed third party experts costs environmental compliance past ongoing operations including maintenance monitoring expensed incurred recoveries third parties recorded assets realizable c11 caltex group companies notes combined financial statements note 1 summary significant accounting policies continued revenue recognition general revenue recognized crude oil natural gas refined product sales title passes specified sales contract reclassifications certain reclassifications made prior year amounts conform 2000 presentation note 2 accounting change affiliate group capitalized certain startup costs primarily organizational training period 19921996 related grassroots refinery construction project thailand costs considered part effort required prepare refinery operations issuance aicpas statement position 985 reporting costs startup activities costs would accounted period expenses group elected early adoption pronouncement effective january 1 1998 accordingly recorded cumulative effect charge income january 1 1998 50 million representing groups share applicable startup costs excluding cumulative effect change accounting startup costs materially affect net income 1998 note 3 restructuringreorganization caltex recorded charge selling general administrative expenses 37 million 86 million 1999 1998 respectively various restructuring reorganization activities undertaken realign downstream operations along functional lines reduce redundant operating activities charges included severance termination benefits 23 million 60 million approximately 200 employees 500 employees 1999 1998 respectively affected employees left caltex december 2000 following table summarizes restructuringreorganization costs 2000 1999 1998 millions us dollars 9 million liability december 31 2000 primarily relates future lease commitments vacated office space remaining lease term ending 2002 adjustments made 2000 1999 recorded liabilities insignificant addition 1999 net income included 27 million tax charge restructuring activities affiliates note 4 assets held disposal group continually reviews asset portfolio periodically sells otherwise disposes various assets longer fit groups strategic direction group recorded charge earnings approximately 4 million 2000 30 million 1999 1998 related various marketing assets primarily service station land buildings removed operation awaiting disposal sale buyers located carrying value assets based appraisals estimated selling prices december 31 2000 approximately 25 million effect suspending depreciation assets held sale 2000 1999 1998 material c12 caltex group companies notes combined financial statements note 5 operating leases group operating leases involving various marketing assets net rental expense 92 million 112 million 103 million 2000 1999 1998 respectively future net minimum rental commitments operating leases noncancelable terms excess one year follows millions us dollars 2001 42 2002 16 2003 7 2004 6 2005 6 2006 thereafter 23 note 6 taxes charged income consist following income taxes computed individual company basis rates effect various countries operation effective tax rate differs expected tax rate us federal corporate tax rate follows 2000 increase effective tax rate primarily due larger proportion earnings higher tax rate foreign jurisdictions 1999 increase effective tax rate resulting sale investment affiliate net effect previously unrecorded foreign tax credit carryforwards 29 million c13 caltex group companies notes combined financial statements note 6 taxes continued deferred income taxes provided tax jurisdiction temporary differences financial reporting tax basis assets liabilities temporary differences tax loss carryforwards give rise deferred tax liabilities assets follows valuation allowance established reduce deferred income tax assets amounts groups judgement likely 50 utilized current future taxable income temporary differences become deductible undistributed earnings subsidiaries affiliates us deferred income tax provision made approximated 33 billion 34 billion december 31 2000 december 31 1999 respectively earnings intended indefinitely reinvested become taxable us upon remittance dividends practical estimate amount tax may payable eventual remittance earnings upon remittance certain foreign countries impose withholding taxes subject certain limitations available use tax credits us tax liability excess us foreign income tax credits recorded realized note 7 inventories reported value inventory december 31 2000 1999 less current cost approximately 152 million 104 million respectively 2000 1998 certain inventories recorded market lower lifo carrying value adjustments market reduced net income 4 million 2000 18 million 1998 1999 market valuation adjustment reserves established prior years eliminated market prices improved physical units inventory sold elimination reserves increased net income 1999 71 million december 31 2000 inventories primarily reported lifo carrying cost except approximately 39 million trading inventory recorded market inventory quantities valued lifo basis reduced certain locations periods presented inventory reductions increased net income 2000 1999 41 million year decreased net income 4 million net related market valuation adjustment 1 million 1998 c14 caltex group companies notes combined financial statements note 8 equity affiliates investments affiliates equity include following carrying value groups investment affiliates excess proportionate share affiliate net equity amortized approximately 20 years 1999 caltex corporation sold 50 interest koa oil company limited koa net book value approximately 219 million nippon mitsubishi oil corp approximately 237 million cash result sale caltex incurred additional us tax liabilities approximately 81 million remaining interest star petroleum refining company ltd sprc owned governmental entity kingdom thailand provisions sprc shareholders agreement limit groups control provide active participation minority shareholder routine business operating decisions agreement also mandates reduction group ownership minority position year 2001 however requirement delayed view current economic difficulties region shown summarized combined financial information affiliates equity millions us dollars cash dividends received affiliates 83 million 71 million 50 million 2000 1999 1998 respectively summarized combined financial information shown includes cumulative effect accounting change 1998 described note 2 retained earnings december 31 2000 1999 includes 14 billion represents groups share undistributed earnings affiliates equity c15 caltex group companies notes combined financial statements note 9 shortterm debt shortterm debt consists primarily demand promissory notes acceptance credits overdrafts current portion longterm debt weighted average interest rates shortterm financing december 31 2000 1999 69 65 respectively unutilized lines credit available shortterm financing totaled 10 billion december 31 2000 note 10 longterm debt longterm debt related interest rates 2000 1999 consists following c16 caltex group companies notes combined financial statements note 11 financial instruments certain group companies parties financial instruments offbalance sheet credit market risk principally interest rate risk groups outstanding commitments interest rate swaps foreign currency contractual amounts group enters interest rate swaps managing interest risk effects recognized statement income time interest expense debt relate swap contracts remaining maturities six years net unrealized losses gains contracts outstanding december 31 2000 1999 1 million 4 million respectively group enters forward exchange contracts hedge foreign currency exposure stemming existing liabilities firm commitments contracts purchase foreign currencies principally australian singapore dollars hedge existing liabilities maturities two years net unrealized losses applicable outstanding forward exchange contracts december 31 2000 1999 37 million 5 million respectively group hedges portion market risks associated crude oil petroleum product purchases sales established petroleum futures exchanges used well overthecounter hedge instruments including futures options swaps derivative products gains losses hedges deferred recognized concurrently underlying commodity transactions deferred losses gains hedging contracts outstanding yearend 4 million 2000 4 million 1999 groups recorded value fixed interest rate debt exceeded fair value 27 million 22 million december 31 2000 1999 respectively fair value estimates based present value expected cash flows discounted current market rates similar obligations reported amounts financial instruments cash equivalents marketable securities notes accounts receivable current liabilities approximate fair value short maturities group investments debt securities availableforsale amortized costs 11 million 120 million december 31 2000 1999 respectively fair value securities december 31 2000 1999 approximated amortized costs december 31 2000 1999 investments debt securities availableforsale maturities less ten years groups carrying amount investments affiliates accounted equity included 1 million 2 million december 31 2000 1999 respectively aftertax unrealized net gains investments held companies group exposed credit risks event nonperformance counterparties financial instruments financial instruments institutions group expect counterparty fail meet obligations given high credit ratings financial instruments exposed credit risk consist primarily trade receivables dispersed among countries group operates thus limiting concentration risk group performs ongoing credit evaluations customers generally require collateral letters credit principal security obtained support lines credit financial strength customer considered sufficient credit losses historically within managements expectations c17 caltex group companies notes combined financial statements note 12 employee benefit plans group various retirement plans including defined benefit pension plans covering substantially employees benefit levels vesting terms funding practices vary among plans following provides reconciliation benefit obligations plan assets funded status various plans primarily foreign c18 caltex group companies notes combined financial statements note 12 employee benefit plans continued postretirement benefits comprised contributory healthcare life insurance plans one percentage point change assumed health care cost trend rate 10 would change postretirement benefit obligation 9 million would material effect aggregate service interest components note 13 commitments contingencies caltex involved tax audits united states certain jurisdictions internal revenue services audit years 19871993 administratively settled caltex receive refund tax interest years jurisdictions outside united states tax authorities audits various stages completion opinion management adequate provision made income taxes years examination subject future examination caltex certain subsidiaries named defendants along privately held philippine ferry shipping companies shipping companys insurer various lawsuits filed us philippines behalf least 3350 parties either survivors relatives persons allegedly died collision philippine waters december 20 1987 one vessel involved collision carrying products caltex philippines inc subsidiary caltex connection contract affreightment although caltex direct indirect ownership operational responsibility either vessel various theories liability alleged caltex major suit filed us louisiana state court dismissed december 2000 forum non conveniens grounds currently appeal plaintiffs caltex vigorously contest appeal caltex actively pursuing dismissal philippine litigation strength philippine supreme court decision absolving responsibility collision reasonable estimate damages involved sought made time group may subject loss contingencies pursuant environmental laws regulations countries operates future may require group take action correct remediate effects environment prior disposal release petroleum substances group amount future cost indeterminable due factors nature new regulations unknown magnitude possible contamination unknown timing extent corrective actions may required extent costs recoverable third parties groups opinion impossible ascertain ultimate legal financial liability respect mentioned contingent liabilities aggregate amount may arise liabilities anticipated material relation groups combined financial position liquidity results operations reasonable period time c19 caltex group companies notes combined financial statements note 13 commitments contingencies continued caltex subsidiary contractual commitment 2007 purchase petroleum products conjunction financing refinery owned affiliate total future estimated commitments contract based current pricing projected growth rates approximately 08 billion per year purchases billions us dollars similar contracts 10 07 08 2000 1999 1998 respectively caltex contingently liable sponsor support funding maximum 193 million connection affiliates project finance obligations project operational since 1996 successfully completed mechanical technical reliability tests associated plant physical completion covenant however affiliate unable satisfy covenant relating working capital requirement result technical event default exists waived lenders enforced rights remedies finance agreements indicated intention affiliate current financial obligations anticipates resolving issue secured creditors restructuring discussions 2000 caltex sponsor provided temporary shortterm extended trade credit related crude oil supply outstanding balance owing caltex december 31 2000 124 million note 14 oil gas exploration development producing activities financial statements chevron corporation texaco inc contain required supplementary information oil gas producing activities including disclosures affiliates equity accordingly disclosures presented herein c20item 14 principal accounting fees services information required item 9e schedule 14a contained heading “board proposal ratify pricewaterhousecoopers llp independent registered public accounting firm 2018 proxy statement incorporated reference annual report form 10k page intentionally left blank financial table contents managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page 34 discussion financial results major operating area three years ended december 31 2017 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil canada china colombia democratic republic congo denmark indonesia kazakhstan myanmar nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand united kingdom united states venezuela earnings company depend mostly profitability upstream business segment biggest factor affecting results operations upstream segment price crude oil price crude oil fallen significantly since midyear 2014 downturn price crude oil impacted companys results operations cash flows leverage capital exploratory investment program production outlook sustained lower price environment could result impairment writeoff specific assets future periods company responded reductions operating expenses pacing refocusing capital exploratory expenditures increased asset sales company anticipates crude oil prices increase future continued growth demand slowing supply growth bring global markets balance however timing increase unknown companys downstream business crude oil largest cost component refined products companys objective deliver competitive results shareholder value business environment effective tax rate company change substantially periods significant earnings volatility due mix effects impacted absolute level earnings losses whether arise higher lower tax rate jurisdictions result decline increase effective income tax rate one period may indicative expected results future periods note 18 provides company’s effective income tax rate last three years refer cautionary statement relevant forwardlooking information page 2 risk factors part item 1a pages 19 22 discussion inherent risks could materially impact companys results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial managements discussion analysis financial condition results operations performance value growth companys asset sale program 2016 2017 targeted beforetax proceeds 510 billion proceeds deposits related asset sales 28 billion 2016 52 billion 2017 refer “results operations” section beginning page 34 discussions net gains asset sales 2017 asset dispositions restructurings may also occur future periods could result significant gains losses company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry production inventory levels technology advancements production quotas actions imposed organization petroleum exporting countries opec producers actions regulators weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control including among things general level inflation commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services industry cost inflation onshore segments including north america unconventionals started modestly rise 2017 increases commodity prices higher levels activity investment offshore costs continue decline driven lower offshore activity levels increased competition among suppliers capital exploratory expenditures operating expenses could also affected damage production facilities caused severe weather civil unrest delays construction factors chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 54 per barrel fullyear 2017 compared 44 2016 midfebruary 2018 brent price 62 per barrel majority company’s equity crude production priced based brent benchmark crude oil prices better supported 2017 amid firming demand rising geopolitical tensions ongoing output reductions opec certain nonopec producers however upside limited rebounding us nonopec production resulted ongoing oversupplied conditions prices weakened gradually first half 2017 due concerns opec cuts would allowed expire june 2017 firmed managements discussion analysis financial condition results operations second half 2017 opec’s decision may 25 2017 extend cuts first quarter 2018 price support reinforced november 30 2017 opec nonopec partners agreed extend output cuts december 2018 wti price averaged 51 per barrel fullyear 2017 compared 43 2016 midfebruary 2018 wti price 59 per barrel wti traded discount brent throughout 2017 starting 2017 2 discount brent wti discount expanded 6 yearend due rising us crude production rebounding inventories growing concerns pipeline infrastructure constraints would restrict flows export outlets gulf coast differential crude oil prices exists highgravity lowsulfur crudes lowgravity highsulfur crudes amount differential period associated relative supplydemand balances crude type secondhalf 2017 differential held generally steady north america robust refinery demand supported heavy crude values light sweet crude prices us supported rising exports domestic production outside north america differentials steady modestly wider amid wellsupplied light sweet crude markets atlantic basin rising us exports asia increased competitive pressure middle east exports region chevron producing interests heavy crude oil california indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page 39 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets fluctuations price natural gas united states closely associated customer demand relative volumes produced stored north america united states prices henry hub averaged 297 per thousand cubic feet mcf 2017 compared 246 2016 midfebruary 2018 henry hub spot price 257 per mcf outside united states price changes natural gas depend wide range supply demand regulatory circumstances chevron sells natural gas domestic pipeline market locations chevron invested longterm projects produce liquefy natural gas transport tanker markets companys longterm contract prices liquefied natural gas lng typically linked crude oil prices equity lng offtake operated australian lng projects committed binding longterm contracts remainder sold asian spot lng market asian spot market reflects supply demand lng pacific basin directly linked crude oil prices international natural gas realizations averaged 462 per mcf 2017 compared 402 per mcf 2016 see page 39 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2017 averaged 2728 million barrels per day onesixth company’s net oilequivalent production 2017 occurred opecmember countries angola nigeria venezuela opec quotas effect company’s net crude oil production 2017 2016 company estimates net oilequivalent production 2018 grow 4 7 percent compared 2017 assuming brent crude oil price 60 per barrel excluding impact anticipated 2018 asset sales estimate subject many factors uncertainties including quotas actions may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production managements discussion analysis financial condition results operations partitioned zone saudi arabia kuwait production shutin beginning may 2015 result difficulties securing work equipment permits net oilequivalent production partitioned zone 2014 81000 barrels per day 2015 net oilequivalent production averaged 28000 barrels per day early 2018 production remains shut exact timing production restart uncertain dependent dispute resolution saudi arabia kuwait financial effects loss production 2017 significant expected significant 2018 net proved reserves consolidated companies affiliated companies totaled 117 billion barrels oilequivalent yearend 2017 increase 5 percent yearend 2016 reserve replacement ratio 2017 155 percent refer table v beginning page 95 tabulation company’s proved net oil gas reserves geographic area beginning 2015 yearend 2015 2017 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2017 refer “results operations” section pages 34 37 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast gulf coast united states asia southern africa chevron operates significant ownership interests refineries areas refer “results operations” section pages 34 37 additional discussion company’s downstream operations consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies managements discussion analysis financial condition results operations operating developments key operating developments events 2017 early 2018 included following upstream angola commenced production main production facility mafumeira sul project australia achieved startup train 3 gorgon lng project train 1 wheatstone lng project canada achieved startup hebron project indonesia completed sale geothermal business united states announced significant crude oil discoveries whale ballymore prospects gulf mexico downstream canada completed sale refining marketing assets british columbia alberta united states company’s 50 percentowned affiliate chevron phillips chemical company llc achieved startup two polyethylene units reached mechanical completion new ethane cracker us gulf coast petrochemicals project texas common stock dividends 2017 annual dividend 432 per share making 2017 30th consecutive year company increased annual dividend payout january 2018 companys board directors approved 004 per share increase quarterly dividend 112 per share payable march 2018 results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 15 beginning page 67 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages 30 33 us upstream us upstream earnings 364 billion 2017 compared loss 205 billion 2016 improvement earnings reflected benefit 333 billion us tax reform higher crude oil natural gas realizations 13 billion managements discussion analysis financial condition results operations lower depreciation expenses 650 million primarily reflecting decrease impairments asset writeoffs lower operating expenses 140 million also contributed improvement us upstream operations incurred loss 205 billion 2016 compared loss 406 billion 2015 improvement due lower depreciation expense 12 billion lower exploration expense 780 million primarily reflecting decrease impairments project cancellations also contributing improvement lower operating expenses 600 million lower tax items 190 million partially offsetting effects lower crude oil natural gas realizations 920 million company’s average realization us crude oil natural gas liquids 2017 4453 per barrel compared 3500 2016 4270 2015 average natural gas realization 210 per thousand cubic feet 2017 compared 159 2016 192 2015 net oilequivalent production 2017 averaged 681000 barrels per day 1 percent 2016 5 percent 2015 2017 2016 production increases shale tight properties permian basin texas new mexico base business gulf mexico offset effect asset sales 59000 barrels per day normal field declines 2016 2015 production increases shale tight properties permian basin texas new mexico base business offset effect asset sales normal field declines net liquids component oilequivalent production 2017 averaged 519000 barrels per day 3 percent 2016 4 percent 2015 net natural gas production averaged 970 million cubic feet per day 2017 13 percent 2016 26 percent 2015 primarily result asset sales refer “selected operating data” table page 39 threeyear comparison production volumes united states international upstream international upstream earnings 451 billion 2017 compared loss 483 million 2016 increase earnings primarily due higher crude oil realizations 259 billion higher natural gas sales volumes 122 billion higher gains asset sales 750 million lower operating expenses 410 million foreign currency effects unfavorable impact earnings 578 million periods international upstream incurred loss 483 million 2016 compared earnings 209 billion 2015 decrease earnings primarily due lower crude oil realizations 189 billion lower natural gas realizations 600 million lower gains asset sales 450 million higher tax items 330 million partially offsetting decrease lower exploration operating expenses 640 million 520 million respectively higher natural gas sales volumes 330 million foreign currency effects unfavorable impact earnings 603 million periods company’s average realization international crude oil natural gas liquids 2017 4946 per barrel compared 3861 2016 4652 2015 average natural gas realization 462 per thousand cubic feet 2017 compared 402 453 2016 2015 respectively international net oilequivalent production 205 million barrels per day 2017 8 percent 2016 2015 2017 2016 production increases major capital projects lower planned maintenancerelated downtime partially offset production entitlement effects several locations normal field declines 2016 2015 production increases major capital projects base business shale tight properties largely offset normal field declines partitioned zone shutin impact civil unrest nigeria planned turnaround activity net liquids component international oilequivalent production 120 million barrels per day 2017 1 percent 2016 3 percent 2015 international net natural gas production 51 billion cubic feet per day 2017 23 percent 2016 28 percent 2015 refer “selected operating data” table page 39 threeyear comparison international production volumes managements discussion analysis financial condition results operations us downstream us downstream operations earned 294 billion 2017 compared 131 billion 2016 increase primarily due 116 billion benefit us tax reform higher margins refined product sales 380 million lower operating expenses 160 million absence asset impairment 110 million partially offsetting increase lower gains asset sales 90 million lower earnings 50 percentowned chevron phillips chemicals company llc 70 million primarily reflecting impacts hurricane harvey us downstream operations earned 131 billion 2016 compared 318 billion 2015 decrease due lower margins refined product sales 145 billion lower earnings 50 percentowned chevron phillips chemicals company llc 400 million asset impairment 110 million partially offsetting decrease lower operating expenses 80 million higher gains asset sales 110 million refined product sales 120 million barrels per day 2017 1 percent primarily due divestment hawaii refining marketing assets fourth quarter 2016 sales volumes refined products 121 million barrels per day 2016 decrease 1 percent 2015 mainly reflecting lower sales diesel us branded gasoline sales 528000 barrels per day 2017 decreased 1 percent 2016 increased 1 percent 2015 refer “selected operating data” table page 39 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 228 billion 2017 compared 213 billion 2016 increase earnings primarily due higher gains asset sales 360 million partially offset higher operating expenses 140 million foreign currency effects unfavorable impact earnings 65 million periods international downstream earned 213 billion 2016 compared 442 billion 2015 decrease earnings primarily due absence 16 billion gain sale companys interest caltex australia limited 2015 partially offset 2016 asset sales gains 420 million lower margins refined product sales 114 billion also contributed decline partially offsetting decreases lower operating expenses 240 million foreign currency effects unfavorable impact earnings 72 million periods total refined product sales 149 million barrels per day 2017 2 percent 2016 primarily due higher diesel jet fuel sales 146 million barrels per day 2016 3 percent 2015 excluding effects caltex australia limited divestment refined product sales 1 percent primarily reflecting lower fuel oil sales refer “selected operating data” table page 39 threeyear comparison sales volumes gasoline refined products refinery input volumes consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2017 increased 277 billion 2016 mainly due higher tax items primarily reflecting 247 billion expense us tax reform higher interest expense reclamation related charge former mining asset partially offset lower employee expense foreign currency effects decreased net charges 139 million periods net managements discussion analysis financial condition results operations charges 2016 increased 342 million 2015 mainly due higher corporate charges interest expense corporate tax items partially offset lower environmental reserve additions lower charges related reductions corporate staffs consolidated statement income comparative amounts certain income statement categories shown sales operating revenues increased 2017 mainly due higher refined product crude oil prices higher crude oil volumes higher natural gas volumes decrease 2016 2015 primarily due lower refined product crude oil prices partially offset higher crude oil volumes income equity affiliates increased 2017 2016 mainly due higher upstreamrelated earnings tengizchevroil kazakhstan angola lng income equity affiliates decreased 2016 2015 primarily due lower upstreamrelated earnings tengizchevroil kazakhstan petroboscan venezuela lower downstreamrelated earnings cpchem gs caltex south korea refer note 16 beginning page 70 discussion chevron’s investments affiliated companies income 26 billion 2017 included net gains asset sales 22 billion beforetax income 2016 2015 included net gains asset sales 11 billion 32 billion beforetax respectively interest income approximately 107 million 2017 145 million 2016 119 million 2015 foreign currency effects decreased income 131 million 2017 186 million 2016 increased income 82 million 2015 crude oil product purchases increased 164 billion 2017 primarily due higher crude oil refined product prices higher refined product crude oil volumes decrease 2016 2015 104 billion primarily due lower crude oil refined product prices partially offset increase crude oil volumes operating selling general administrative expenses decreased 11 billion 2017 2016 decrease included lower employee expenses 690 million nonoperated joint venture expenses 380 million operating selling general administrative expenses decreased 25 billion 2016 2015 decrease included lower employee expenses 800 million transportation expenses 680 million contract labor expenses 370 million materials supplies expenses 310 million fuel expenses 310 million exploration expenses 2017 decreased 2016 primarily due lower charges well writeoffs exploration expenses 2016 decreased 2015 primarily due significantly higher 2015 charges well writeoffs largely related project cancellations lower 2016 geological geophysical expenses managements discussion analysis financial condition results operations depreciation depletion amortization expenses decreased 2017 2016 mainly due lower impairments lower depreciation rates certain oil gas producing properties absence 2016 impairment downstream asset partially offsetting decrease higher production levels accretion writeoffs certain oil gas producing fields reclamation related charge former mining asset decrease 2016 2015 primarily due lower impairments certain oil gas producing fields 30 billion 2016 compared 35 billion 2015 also contributing decrease lower production levels accretion expenses certain oil gas producing fields taxes income increased 2017 2016 primarily due higher duties higher crude oil refined product natural gas sales higher production taxes income decreased 2016 2015 primarily due lower refined product crude oil prices divestment pakistan fuels business end june 2015 decline income tax benefit 2017 168 billion due increase total income tax company 1138 billion remeasurement impacts us tax reform us losses tax decreased loss 432 billion 2016 loss 441 million 2017 decrease losses tax primarily driven effect higher crude oil prices us tax benefit increased 650 million yearoveryear periods 232 billion 2016 297 billion 2017 us tax benefit 2017 included 202 billion benefit us tax reform primarily reflected remeasurement us deferred tax assets liabilities reduction 137 billion result impact decrease losses tax 388 billion international income tax increased 216 billion 2016 966 billion 2017 750 billion increase primarily driven effect higher crude oil prices gains asset sales primarily indonesia canada higher crude prices primarily drove 234 billion increase international income tax expense yearoveryear periods 588 million 2016 293 billion 2017 refer also discussion effective income tax rate note 18 page 75 decline income tax expense 2016 186 billion consistent decline total income tax company 700 billion us losses tax increased loss 288 billion 2015 loss 432 billion 2016 144 billion increase losses primarily driven effect lower crude oil prices increase losses direct impact company’s us income tax benefit resulting increase 624 million yearoveryear periods tax benefit 169 billion 2015 tax benefit 232 billion 2016 international income tax reduced calendar years 772 billion 2015 216 billion 2016 556 billion decline also primarily driven effect lower crude oil prices effect drove 124 billion reduction international income tax expense yearoveryear periods 183 billion 2015 588 million 2016 refer also discussion effective income tax rate note 18 page 75 managements discussion analysis financial condition results operations selected operating data12 managements discussion analysis financial condition results operations liquidity capital resources sources uses cash flow operations increased 77 billion 2017 primarily due higher crude oil prices company also continued reduce cash outlays increase asset sales progress actions 2017 included • reducing cash capital expenditures 134 billion 26 percent decrease compared 2016 • reducing operating administrative expenses 11 billion 4 percent decrease compared 2016 • realizing net proceeds asset sales 52 billion 2017 strength company’s balance sheet enabled fund timing differences throughout year cash inflows outflows cash equivalents marketable securities total balances 48 billion 70 billion december 31 2017 2016 respectively cash provided operating activities 2017 205 billion compared 128 billion 2016 195 billion 2015 reflecting higher crude oil prices cash provided operating activities net contributions employee pension plans approximately 10 billion 2017 09 billion 2016 2015 cash provided investing activities included proceeds deposits related asset sales 52 billion 2017 28 billion 2016 57 billion 2015 restricted cash 11 billion 14 billion december 31 2017 2016 respectively held cash shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet amounts generally associated upstream abandonment activities tax payments funds held escrow taxdeferred exchanges refundable deposits related pending asset sales dividends paid common stockholders 81 billion 2017 80 billion 2016 80 billion 2015 debt capital lease obligations total debt capital lease obligations 388 billion december 31 2017 461 billion yearend 2016 73 billion decrease total debt capital lease obligations 2017 primarily due decrease shortterm obligations reflecting higher crude oil prices company completed bond issuance 40 billion first quarter 2017 repaid longterm notes totaling 62 billion matured february november december 2017 company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 152 billion december 31 2017 compared 198 billion yearend 2016 amounts 100 billion 90 billion reclassified longterm debt end 2017 2016 respectively managements discussion analysis financial condition results operations yearend 2017 settlement obligations expected require use working capital 2018 company intent ability evidenced committed credit facilities refinance longterm basis chevron automatic shelf registration statement expires august 2018 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa2 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company also modify capital spending plans provide flexibility continue paying common stock dividend also remain committed retaining company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 19 shortterm debt page 78 common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits company acquire shares program 2017 2016 inception program 2014 company purchased 1809 million shares 200 billion capital exploratory expenditures capital exploratory expenditures business segment 2017 2016 2015 follows managements discussion analysis financial condition results operations total expenditures 2017 188 billion including 47 billion company’s share equityaffiliate expenditures require cash outlays company 2016 2015 expenditures 224 billion 340 billion respectively including company’s share affiliates’ expenditures 38 billion 34 billion respectively 188 billion expenditures 2017 87 percent 164 billion related upstream activities approximately 90 percent expended upstream operations 2016 92 percent 2015 international upstream accounted 69 percent worldwide upstream investment 2017 77 percent 2016 76 percent 2015 company estimates 2018 capital exploratory expenditures 183 billion including 55 billion spending affiliates planned reduction compared 2017 expenditures reflects project completions improved efficiencies investment highgrading including full funding companys advantaged permian basin position approximately 86 percent total 158 billion budgeted exploration production activities approximately 87 billion planned upstream capital spending relates base producing assets including 33 billion permian 10 billion shale tight rock investments approximately 55 billion upstream program planned major capital projects underway including 37 billion associated future growth wellhead pressure management project tengiz field kazakhstan global exploration funding expected 11 billion remaining upstream spend budgeted early stage projects supporting potential future developments company continue monitor crude oil market conditions expects restrict capital outlays oil price conditions deteriorate worldwide downstream spending 2018 estimated 22 billion 14 billion estimated projects united states investments technology companies corporate businesses 2018 budgeted 03 billion noncontrolling interests company noncontrolling interests 12 billion december 31 2017 december 31 2016 distributions noncontrolling interests totaled 78 million 63 million 2017 2016 respectively pension obligations information related pension plan contributions included page 82 note 23 employee benefit plans heading “cash contributions benefit payments” financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2017 book value inventory lower replacement costs based average acquisition costs year approximately 39 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2017 higher 2016 2015 due higher income debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage companys debt ratio 207 percent yearend 2017 compared 241 percent 202 percent yearend 2016 2015 respectively offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2018 14 billion 2019 14 billion managements discussion analysis financial condition results operations 2020 10 billion 2021 09 billion 2022 05 billion 2023 26 billion portion commitments may ultimately shared project partners total payments agreements approximately 13 billion 2017 13 billion 2016 19 billion 2015 following table summarizes company’s significant contractual obligations excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 23 beginning page 82 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 100 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20192020 period amounts represent principal balance include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices direct guarantees company two guarantees equity affiliates totaling 108 billion amount 712 million associated financing arrangement equity affiliate approximate 4year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 370 million associated certain payments terminal use agreement entered equity affiliate approximate 10year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications information related indemnifications included page 88 note 25 contingencies commitments heading “indemnifications” financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2017 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2017 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies companys risk management practices compliance policies reviewed audit committee company’s board directors managements discussion analysis financial condition results operations derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2017 material companys results operations company uses monte carlo simulation method valueatrisk var model estimate maximum potential loss fair value 95 confidence level oneday holding period effect adverse changes market conditions derivative commodity instruments held issued based inputs var companys primary risk exposures area derivative commodity instruments december 31 2017 2016 material companys cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2017 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2017 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” page 71 note 16 investments advances discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page 71 note 17 heading “mtbe” ecuador information related ecuador matters included note 17 heading “ecuador” beginning page 71 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 142 billion asset retirement obligations yearend 2017 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2017 environmental expenditures refer note 25 page 88 additional discussion environmental remediation provisions yearend reserves refer also note 26 page 89 additional discussion companys asset retirement obligations managements discussion analysis financial condition results operations suspended wells information related suspended wells included note 21 accounting suspended exploratory wells beginning page 80 income taxes information related income tax contingencies included pages 75 78 note 18 page 87 note 25 heading “income taxes” contingencies information related contingencies included page 89 note 25 consolidated financial statements heading “other contingencies” environmental matters company subject various international federal state local environmental health safety laws regulations marketbased programs laws regulations programs continue evolve expected increase number complexity time govern manner company conducts operations also products sells example international agreements national regional state legislation eg california ab32 sb32 ab398 regulatory measures aim limit reduce greenhouse gas ghg emissions currently various stages implementation consideration ghg issues responses issues international agreements national regional state legislation regulations integrated company’s strategy planning capital investment reviews risk management tools processes applicable also factored company’s longrange supply demand energy price forecasts reflect longrange effects renewable fuel penetration energy efficiency standards climaterelated policy actions demand response oil natural gas prices addition legislation regulations intended address hydraulic fracturing also continue evolve national state local levels refer “risk factors” part item 1a pages 19 22 discussion inherent risks increasingly restrictive environmental regulation could materially impact company’s results operations financial condition costs complying existing laws regulations pertaining company operations products embedded normal costs business however possible predict certainty amount additional investments new existing technology facilities amounts increased operating costs incurred future prevent control reduce eliminate releases hazardous materials pollutants environment remediate restore areas damaged prior releases hazardous materials comply new environmental laws regulations although costs may significant results operations single period company presently expect material adverse effect companys liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2017 approximately 20 billion consolidated companies included expenditures approximately 05 billion environmental capital expenditures 15 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2018 total worldwide environmental capital expenditures estimated 05 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein managements discussion analysis financial condition results operations 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2017 chevrons uop depreciation depletion amortization dda oil gas properties 148 billion proved developed reserves beginning 2017 62 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2017 would increased approximately 800 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page 95 changes proved reserve estimates three years ended december 31 2017 table vii “changes standardized measure discounted future net cash flows proved reserves” page 101 estimates proved reserve values three years ended december 31 2017 oil gas reserves commentary read conjunction properties plant equipment section note 1 beginning page 57 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions generally consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 24 page 87 section properties plant equipment note 1 summary significant accounting policies beginning page 57 company routinely performs impairment reviews triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural managements discussion analysis financial condition results operations gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision companys crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets addition impairments could occur due changes national state local environmental regulations laws including designed stop impede development production oil gas also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value occurs determination must made whether loss otherthantemporary case investment impaired number differing assumptions potentially affecting whether investment impaired period amount impairment sensitivity analysis practicable individually material impairments ppe investments recorded year 2017 company reported impairments certain oil gas properties 2016 due reservoir performance lower crude oil prices company reported impairments certain oil gas properties 2015 primarily result downward revisions companys longerterm crude oil price outlook impairments years 2016 2015 primarily brazil united states sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired resulted larger impacts impaired assets asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2017 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 26 page 89 additional discussions asset retirement obligations pension postretirement benefit plans note 23 beginning page 82 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page 84 note 23 relevant headings actual rates may vary significantly estimates unanticipated changes worlds financial markets 2017 company used expected longterm rate return 675 percent discount rate service costs 42 percent discount rate interest cost 30 percent us pension plans actual return 2017 157 percent 10 years ending december 31 2017 actual asset returns averaged 52 percent plan additionally exception three years within 10year period actual asset returns plan equaled exceeded 675 percent year total pension expense 2017 12 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 61 percent companywide pension expense would reduced total pension plan expense 2017 managements discussion analysis financial condition results operations approximately 79 million 1 percent increase discount rates plan would reduced pension expense 2017 approximately 305 million aggregate funded status recognized december 31 2017 net liability approximately 44 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2017 company used discount rate 35 percent measure obligations us pension plans indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 62 percent companywide pension obligation would reduced plan obligation approximately 478 million would decreased plan’s underfunded status approximately 20 billion 15 billion company’s opeb plans expense 2017 94 million total liability unfunded end 2017 28 billion main us opeb plan company used discount rate service cost 46 percent discount rate interest cost 34 percent measure expense 2017 36 percent discount rate measure benefit obligations december 31 2017 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2017 opeb expense opeb liabilities end 2017 information sensitivity health care costtrend rate refer page 84 note 23 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page 84 note 23 description method used amortize 55 billion beforetax actuarial losses recorded company december 31 2017 estimate costs recognized expense 2018 addition information related company contributions included page 86 note 23 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 25 beginning page 87 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2017 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 5 beginning page 61 information regarding new accounting standards quarterly results stock market data unaudited consolidated statement income millions dollars except pershare amounts consolidated statement comprehensive income millions dollars consolidated balance sheet millions dollars except pershare amount consolidated statement cash flows millions dollars consolidated statement equity shares thousands amounts millions dollars notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 inputs quoted prices active markets identical assets liabilities level 2 inputs quoted prices included within level 1 directly indirectly observable asset liability level 3 inputs observable market derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories primarily stated net realizable value properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas notes consolidated financial statements millions dollars except pershare amounts properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 21 beginning page 80 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net cash flows proved crude oil natural gas properties company performs impairment reviews country concession psc development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 10 beginning page 64 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 26 page 89 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced impairments capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annually december 31 frequently event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 26 page 89 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured notes consolidated financial statements millions dollars except pershare amounts currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page 52 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement company’s longterm incentive plan ltip awards include stock options stock appreciation rights graded vesting provisions onethird award vests first second third anniversaries date grant addition performance shares granted companys ltip vest end threeyear performance period awards granted companys ltip beginning 2017 stock options stock appreciation rights graded vesting one third award vests annually january 31 first anniversary grant date standard restricted stock unit awards cliff vesting total award vest january 31 fifth anniversary grant date subject adjustment upon termination pursuant satisfaction certain criteria company amortizes awards straightline basis note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ending december 31 2017 reflected table amounts net tax refer note 23 beginning page 82 reclassified components totaling 796 included employee benefit costs year ending december 31 2017 related income taxes period totaling 286 reflected income tax expense consolidated statement income reclassified amounts insignificant notes consolidated financial statements millions dollars except pershare amounts note 3 noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income loss attributable chevron corporation” activity equity attributable noncontrolling interests 2017 2016 2015 follows note 4 information relating consolidated statement cash flows loan tengizchevroil llp development future growth wellhead pressure management project represents majority net borrowing loans equity affiliates 2016 “net sales treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 1 2 2017 2016 2015 respectively purchases made companys share repurchase program 2017 2016 2015 notes consolidated financial statements millions dollars except pershare amounts 2017 2016 2015 “net purchases sales shortterm investments” generally consisted restricted cash associated upstream abandonment activities tax payments certain pension fund payments invested cash shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet consolidated statement cash flows excludes changes consolidated balance sheet affect cash 2017 approximate 400 increase “deferred credits noncurrent obligations” corresponding increase “properties plant equipment cost” considered noncash transactions excluded “net increase operating working capital” “capital expenditures” amount related upstream operating agreements outside united states refer also note 26 page 89 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2017 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 1183 2017 56 2016 1362 2015 note 5 new accounting standards revenue recognition topic 606 revenue contracts customers july 2015 fasb approved oneyear deferral effective date asu 201409 becomes effective company january 1 2018 standard provides single comprehensive revenue recognition model contracts customers eliminates industryspecific revenue recognition guidance expands disclosure requirements company elected adopt standard using modified retrospective transition method sales operating revenues” consolidated statement income includes excise valueadded similar taxes sales transactions upon adoption standard revenue exclude salesbased taxes collected behalf third parties impact earnings company completed accounting policy system enhancements necessary meet standards requirements company expect implementation standard material effect consolidated financial statements leases topic 842 february 2016 fasb issued asu 201602 becomes effective company january 1 2019 standard requires lessees present rightofuse assets lease liabilities balance sheet companys implementation efforts focused accounting policy disclosure updates system enhancements necessary meet standards requirements company evaluating effect standard company’s consolidated financial statements financial instruments credit losses topic 326 june 2016 fasb issued asu 201613 becomes effective company beginning january 1 2020 standard requires companies use forwardlooking information calculate credit loss estimates company evaluating effect standard company’s consolidated financial statements intangibles goodwill topic 350 january 2017 fasb issued asu 201704 standard simplifies accounting goodwill impairment company chosen early adopt beginning january 1 2017 early adoption effect companys consolidated financial statements income gains losses derecognition nonfinancial assets subtopic 61020 march 2017 fasb issued asu 201705 becomes effective company january 1 2018 standard provides clarification regarding notes consolidated financial statements millions dollars except pershare amounts guidance accounting derecognition nonfinancial assets company expect implementation standard material effect consolidated financial statements compensation retirement benefits topic 715 march 2017 fasb issued asu 201707 becomes effective company january 1 2018 standard requires disaggregation service cost component components net periodic benefit cost allows service cost component net benefit cost eligible capitalization company expect implementation standard material effect consolidated financial statements statement cash flows topic 230 classification certain cash receipts cash payments august 2016 fasb issued asu 201615 becomes effective company january 1 2018 retrospective basis standard provides clarification certain cash receipts cash payments presented classified statement cash flows company expect adoption asu material impact consolidated statement cash flows statement cash flows topic 230 restricted cash november 2016 fasb issued asu 201618 becomes effective company january 1 2018 retrospective basis standard requires entity explain changes total cash equivalents restricted cash restricted cash equivalents statement cash flows provide reconciliation balance sheet cash equivalents restricted cash restricted cash equivalents separately presented one line item balance sheet upon adoption company’s restricted cash balances included beginning ending balances consolidated statement cash flows note 6 lease commitments certain noncancellable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2017 2016 2015 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2017 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows notes consolidated financial statements millions dollars except pershare amounts note 7 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows note 8 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 16 beginning page 70 discussion tco operations summarized financial information 100 percent tco presented table notes consolidated financial statements millions dollars except pershare amounts note 9 summarized financial data chevron phillips chemical company llc chevron 50 percent equity ownership interest chevron phillips chemical company llc cpchem refer note 16 beginning page 70 discussion cpchem operations summarized financial information 100 percent cpchem presented table note 10 fair value measurements tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2017 december 31 2016 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2017 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company individually material impairments 2017 company reported impairments certain oil gas properties 2016 primarily due reservoir performance lower crude oil prices impairments 2016 primarily brazil united states investments advances company individually material impairments investments advances 2017 2016 assets liabilities measured fair value recurring basis notes consolidated financial statements millions dollars except pershare amounts assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 4813 6988 december 31 2017 december 31 2016 respectively fair values cash equivalents classified level 1 reflect cash would received instruments settled december 31 2017 cash equivalents” include investments carryingfair value 1130 1426 december 31 2017 december 31 2016 respectively december 31 2017 investments classified level 1 include restricted funds related certain upstream abandonment activities tax payments refundable deposits related pending asset sales reported “deferred charges assets” consolidated balance sheet longterm debt 23477 26193 december 31 2017 december 31 2016 respectively estimated fair values 23943 26627 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 23245 classified level 1 fair value longterm debt 698 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2017 2016 material note 11 financial derivative instruments derivative commodity instruments company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2017 december 31 2016 december 31 2015 classification consolidated balance sheet consolidated statement income next page notes consolidated financial statements millions dollars except pershare amounts consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2017 december 31 2016 consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions right offset concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers note 12 assets held sale december 31 2017 company classified 640 net properties plant equipment “assets held sale” consolidated balance sheet assets primarily associated downstream upstream operations anticipated sold next 12 months revenues earnings contributions assets 2017 material note 13 equity retained earnings december 31 2017 2016 included approximately 18473 16479 respectively company’s share undistributed earnings equity affiliates notes consolidated financial statements millions dollars except pershare amounts december 31 2017 82 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron longterm incentive plan addition 800468 shares remain available issuance 1600000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 14 earnings per share basic earnings per share eps based upon “net income loss attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 22 “stock options sharebased compensation” beginning page 81 table sets forth computation basic diluted eps note 15 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported international” outside united states notes consolidated financial statements millions dollars except pershare amounts segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments receivables assets yearend 2017 2016 follows segment sales operating revenues operating segment sales operating revenues including internal transfers years 2017 2016 2015 presented table next page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil activities include revenues insurance operations real estate activities technology companies notes consolidated financial statements millions dollars except pershare amounts segment income taxes segment income tax expense years 2017 2016 2015 follows segment information additional information segmentation major equity affiliates contained note 16 page 70 information related properties plant equipment segment contained note 24 page 87 notes consolidated financial statements millions dollars except pershare amounts note 16 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2017 company’s carrying value investment tco 130 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets included investment loan tco fund development future growth wellhead pressure management project balance 2060 including accrued interest see note 8 page 63 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company operates hamaca heavyoil production upgrading project venezuela’s orinoco belt december 31 2017 company’s carrying value investment petropiar approximately 145 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company investments advances totaling 1151 includes longterm loans 727 yearend 2017 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela december 31 2017 company’s carrying value investment petroboscan approximately 105 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets company also outstanding longterm loan petroboscan 686 yearend 2017 notes consolidated financial statements millions dollars except pershare amounts angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals lubricants predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 information “sales operating revenues” consolidated statement income includes 8165 5786 4850 affiliated companies 2017 2016 2015 respectively “purchased crude oil products” includes 4800 3468 4240 affiliated companies 2017 2016 2015 respectively “accounts notes receivable” consolidated balance sheet includes 1141 676 due affiliated companies december 31 2017 2016 respectively “accounts payable” includes 498 383 due affiliated companies december 31 2017 2016 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevrons net loans affiliates 3853 3535 410 december 31 2017 2016 2015 respectively note 17 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party eight pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador background chevron defendant civil lawsuit initiated superior court nueva loja lago agrio ecuador may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations notes consolidated financial statements millions dollars except pershare amounts ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations lago agrio judgment 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first second interim awards international arbitration tribunal discussed march 29 2012 matter transferred provincial court national court justice november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court lago agrio approved courtappointed liquidator’s report damages calculated total judgment case 19100 november 13 2013 national court ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 23 2013 chevron appealed decision ecuador constitutional court ecuadors highest court reporting justice constitutional court heard oral arguments appeal july 16 2015 notes consolidated financial statements millions dollars except pershare amounts lago agrio plaintiffs enforcement actions chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment may 1 2013 ontario superior court justice held court jurisdiction chevron canada limited purposes action stayed action due absence evidence chevron corporation assets ontario lago agrio plaintiffs appealed decision december 17 2013 court appeals ontario affirmed lower court’s decision jurisdiction set aside stay allowing recognition enforcement action heard ontario superior court justice chevron appealed decision supreme court canada september 4 2015 supreme court dismissed appeal affirmed ontario superior court justice jurisdiction chevron canada limited purposes action recognition enforcement proceeding related preliminary motions proceeding ontario superior court justice january 20 2017 ontario superior court justice granted chevron canada limited’s chevron corporation’s motions summary judgment concluding two companies separate legal entities separate rights obligations result superior court dismissed recognition enforcement claim chevron canada limited chevron corporation still remains defendant action february 3 2017 lago agrio plaintiffs appealed superior courts january 20 2017 decision june 27 2012 lago agrio plaintiffs filed complaint chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment chevron answered complaint accordance brazilian procedure matter referred public prosecutor nonbinding opinion issues raised complaint may 13 2015 public prosecutor issued nonbinding opinion recommended superior court justice reject plaintiffs recognition enforcement request finding among things lago agrio judgment procured fraud corruption cannot recognized brazil violates brazilian international public order november 29 2017 superior court justice issued decision dismissing lago agrio plaintiffs’ recognition enforcement proceeding based jurisdictional grounds october 15 2012 provincial court lago agrio issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary ingeniero norberto priu requiring shares companies embargoed requiring third parties withhold 40 percent payments due chevron argentina srl ordering banks withhold 40 percent funds chevron argentina srl bank accounts december 14 2012 argentinean court rejected motion revoke freeze order modified ordering third parties required withhold funds must report payments court also clarified freeze order relating bank accounts excludes taxes january 30 2013 appellate court upheld freeze order june 4 2013 supreme court argentina revoked freeze order entirety december 12 2013 lago agrio plaintiffs served chevron notice filing enforcement proceeding national court first instance argentina chevron filed answer february 27 2014 lago agrio plaintiffs responded december 29 2015 april 19 2016 public prosecutor argentina issued nonbinding opinion recommending national court first instance argentina reject lago agrio plaintiffs request recognize ecuadorian judgment argentina february 24 2017 public prosecutor argentina issued supplemental opinion reaffirming previous recommendations november 1 2017 national court first instance argentina issued decision dismissing lago agrio plaintiffs recognition enforcement proceeding based jurisdictional grounds november 2 2017 lago agrio plaintiffs appealed decision federal civil court appeals chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador enforcement action chevron expects continue vigorous defense imposition liability ecuadorian courts contest defend enforcement actions companys bilateral investment treaty arbitration claims chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment notes consolidated financial statements millions dollars except pershare amounts agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit january 25 2012 tribunal issued first interim measures award requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron february 27 2012 tribunal issued third interim award confirming jurisdiction hear chevrons arbitration claims february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” republic ecuador subsequently filed district court hague request set aside tribunal’s interim awards first partial award described january 20 2016 district court denied republics request april 13 2016 republic ecuador appealed decision july 18 2017 appeals court hague denied republics appeal october 18 2017 republic appealed decision appeals court hague supreme court netherlands tribunal divided merits phase proceeding three phases september 17 2013 tribunal issued first partial award phase one finding settlement agreements republic ecuador texpet applied texpet chevron released texpet chevron claims based collective diffuse rights arising texpets operations former concession area precluded third parties asserting collectivediffuse rights environmental claims relating texpets operations former concession area preclude individual claims personal harm tribunal held hearing april 2930 2014 address remaining issues relating phase one march 12 2015 issued nonbinding decision lago agrio plaintiffs complaint face includes claims barred settlement agreement republic ecuador texpet decision tribunal deferred phase two remaining issues phase one including whether republic ecuador breached 1995 settlement agreement remedies available chevron texpet result breach phase two issues addressed hearing held april may 2015 tribunal set date phase three damages phase arbitration companys rico action series us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron sought relief included declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable trial commenced october 15 2013 concluded november 22 2013 march 4 2014 federal district court entered judgment favor chevron prohibiting defendants seeking enforce lago agrio judgment united states prohibiting profiting illegal acts defendants appealed federal district courts decision april 20 2015 panel us court appeals second circuit heard oral arguments august 8 2016 second circuit issued unanimous opinion affirming full judgment federal district court favor chevron october 27 2016 second circuit denied defendants petitions en banc rehearing opinion appeal march 27 2017 two defendants filed petition writ certiorari united states supreme court june 19 2017 united states supreme court denied defendants petition writ certiorari managements assessment ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’ submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss notes consolidated financial statements millions dollars except pershare amounts note 18 taxes reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table includes onetime tax costs benefits associated changes uncertain tax positions valuation allowances 2017 decline income tax benefit 1681 benefit 1729 2016 benefit 48 2017 result yearoveryear increase total income tax expense primarily due effects higher crude oil prices gains asset sales primarily indonesia canada addition tax benefit year includes provisional benefit 2020 us tax reform primarily reflects remeasurement us deferred tax assets liabilities company’s effective tax rate changed 80 percent 2016 05 percent 2017 change effective tax rate primarily consequence mix effect resulting absolute level earnings losses whether arose higher lower tax rate jurisdictions 2017 impact us tax reform noted us tax reform resulted remeasurement us deferred tax assets liabilities final impact known actual 2017 us tax return submitted 2018 may result change provisional amounts recognized notes consolidated financial statements millions dollars except pershare amounts company records deferred taxes taxjurisdiction basis reported deferred tax balances composed following deferred tax liabilities end 2017 decreased approximately 5700 yearend 2016 decrease primarily related property plant equipment temporary differences mainly due change enacted us tax rate deferred tax assets decreased approximately 2300 2017 decreases mainly due change enacted us tax rate primarily impacted asset retirement obligations employee benefits tax loss carry forwards decrease partially reduced increase foreign tax credits arising earnings hightax rate international jurisdictions substantially offset valuation allowances overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2017 company tax loss carryforwards approximately 16102 tax credit carryforwards approximately 1379 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2018 2034 us foreign tax credit carryforwards 11872 expire 2018 2027 december 31 2017 2016 deferred taxes classified consolidated balance sheet follows enactment us tax reform imposed onetime us federal tax deemed repatriation unremitted earnings indefinitely reinvested abroad material impact company’s financial results indefinite reinvestment assertion continues apply purpose determining deferred tax liabilities us state foreign withholding tax purposes us state foreign withholding taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 57300 december 31 2017 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount state foreign taxes might payable possible remittance earnings intended reinvested indefinitely company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods notes consolidated financial statements millions dollars except pershare amounts following table indicates changes company’s unrecognized tax benefits years ended december 31 2017 2016 2015 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included increase unrecognized tax benefits december 31 2016 december 31 2017 primarily due foreign tax credits associated deemed repatriation increase unrecognized tax benefits related foreign tax credits impact effective tax rate since change deferred tax asset fully offset change valuation allowance resolution numerous issues various tax jurisdictions year also impacted movement december 31 2016 december 31 2017 approximately 81 percent 4828 unrecognized tax benefits december 31 2017 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2017 jurisdictions latest years income tax examinations finalized follows united states 2011 nigeria 2000 australia 2006 angola 2016 kazakhstan 2007 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits april 21 2017 adverse decision issued full federal court australia regarding interest rate applied certain chevron intercompany loans august 14 2017 agreement reached australian taxation office settle dispute management believes agreed terms reasonable resolution dispute material impact 2017 results company consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2017 accruals 178 anticipated interest penalty obligations included consolidated balance sheet compared accruals 424 yearend 2016 income tax expense benefit associated interest penalties 161 38 195 2017 2016 2015 respectively notes consolidated financial statements millions dollars except pershare amounts note 19 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2017 company interest rate swaps shortterm debt december 31 2017 company 10000 committed credit facilities various major banks enable refinancing shortterm obligations longterm basis credit facilities consist 364day facility enables borrowing 9575 allows company convert amounts outstanding term loan period one year 425 fiveyear facility expiring december 2020 facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2017 company classified 10000 9000 shortterm debt longterm december 31 2017 2016 respectively settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis notes consolidated financial statements millions dollars except pershare amounts note 20 longterm debt total longterm debt excluding capital leases december 31 2017 33477 company’s longterm debt outstanding yearend 2017 2016 follows weightedaverage interest rate december 31 2017 interest rate december 31 2017 chevron automatic shelf registration statement expires august 2018 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt principal balance 30234 matures follows 2018 6722 2019 5000 2020 5054 2021 2054 2022 4050 2022 7354 company completed bond issuance 4000 first quarter 2017 see note 10 beginning page 64 information concerning fair value company’s longterm debt notes consolidated financial statements millions dollars except pershare amounts note 21 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well b business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense following table indicates changes company’s suspended exploratory well costs three years ended december 31 2017 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 3395 exploratory well costs capitalized one year december 31 2017 2257 17 projects related projects drilling activities underway firmly planned near future 1138 balance related 15 projects areas requiring major capital expenditure production could begin additional drilling efforts underway firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1138 referenced following activities associated assessing reserves projects’ economic viability 190 two projects undergoing frontend engineering design final investment decision expected within four years b 99 one project development concept review government c 826 seven projects development alternatives review 23 five projects miscellaneous activities projects smaller amounts suspended progress made 32 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects half decisions expected occur next five years 3395 suspended well costs capitalized period greater one year december 31 2017 represents 158 exploratory wells 32 projects tables contain aging costs well project basis notes consolidated financial statements millions dollars except pershare amounts note 22 stock options sharebased compensation expense stock options 2017 2016 2015 137 89 tax 271 176 tax 312 203 tax respectively addition compensation expense stock appreciation rights restricted stock performance shares restricted stock units 231 150 tax 371 241 tax 32 21 tax 2017 2016 2015 respectively significant stockbased compensation cost capitalized december 31 2017 december 31 2016 cash received payment option exercises sharebased payment arrangements 2017 2016 2015 1100 647 195 respectively actual tax benefits realized tax deductions option exercises 48 21 17 2017 2016 2015 respectively cash paid settle performance shares stock appreciation rights 187 82 104 2017 2016 2015 respectively awards chevron longterm incentive plan ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance shares nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards issued january 1 2017 contractual terms vary three years performance shares restricted stock units 10 years stock options stock appreciation rights awards issued january 1 2017 contractual terms vary three years performance shares special restricted stock units 5 years standard restricted stock units 10 years stock options stock appreciation rights forfeitures performance shares restricted stock units stock appreciation rights recognized occur forfeitures stock options estimated using historical forfeiture data dating back 1990 fair market values stock options stock appreciation rights granted 2017 2016 2015 measured date grant using blackscholes optionpricing model following weightedaverage assumptions 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2017 presented total intrinsic value ie difference exercise price market price options exercised 2017 2016 2015 407 240 120 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2017 88 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plan cost expected recognized weightedaverage period 14 years january 1 2017 number ltip performance shares outstanding equivalent 2393428 shares 2017 1623526 performance shares granted 708192 shares vested cash proceeds distributed recipients 217969 shares forfeited december 31 2017 performance shares outstanding 3090793 fair value liability recorded instruments 340 measured using monte carlo simulation method notes consolidated financial statements millions dollars except pershare amounts january 1 2017 number restricted stock units outstanding equivalent 557415 shares 2017 892991 restricted stock units granted 96210 units vested cash proceeds distributed recipients 117696 units forfeited december 31 2017 restricted stock units outstanding 1236500 fair value liability recorded vested portion instruments 98 valued stock price december 31 2017 addition outstanding stock appreciation rights granted ltip totaled approximately 46 million equivalent shares december 31 2017 fair value liability recorded vested portion instruments 115 note 23 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement benefit opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs beginning 2017 medical coverage medicareeligible retirees company’s main us medical plan provided thirdparty private exchange increase premedicare company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension opeb plans 2017 2016 follows notes consolidated financial statements millions dollars except pershare amounts recognized consolidated balance sheet company’s pension opeb plans december 31 2017 2016 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 5286 5511 end 2017 2016 respectively amounts consisted accumulated benefit obligations us international pension plans 12194 5009 respectively december 31 2017 11954 4676 respectively december 31 2016 information us international pension plans accumulated benefit obligation excess plan assets december 31 2017 2016 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2017 2016 2015 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2017 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 15 years respectively amortization periods represent estimated average remaining service employees expected receive notes consolidated financial statements millions dollars except pershare amounts benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2018 company estimates actuarial losses 303 30 15 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 334 recognized “accumulated comprehensive loss” 2018 related lumpsum settlement costs main us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2017 approximately 5 9 years us international pension plans respectively 9 years opeb plans 2018 company estimates prior service credits costs 2 11 28 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2017 company used expected longterm rate return 675 percent us pension plan assets account 68 percent company’s pension plan assets 2016 company used longterm rate return 725 percent plan 2015 750 percent marketrelated value assets main us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension opeb plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds projected cash flows discounted valuation date using yield curve main us pension opeb plans effective discount rates derived analysis end 2017 35 percent main us pension plan 36 percent main us opeb plan discount rates plans end 2016 39 41 percent respectively 2015 40 45 percent plans respectively beginning fiscal year ended december 31 2016 company changed method used estimate service interest cost associated companys main us pension opeb plans new method costs estimated applying spot rates along yield curve relevant projected cash flows prior years service interest costs estimated utilizing single weightedaverage discount rate derived yield curve used measure defined benefit obligations beginning year benefit assumptions assumed health care costtrend rates significant effect amounts reported retiree health care costs measurement accumulated postretirement benefit obligation december 31 2017 main us opeb plan assumed health care costtrend rates start 74 percent 2018 gradually decline 45 percent 2025 beyond measurement december 31 2016 assumed health care costtrend rates notes consolidated financial statements millions dollars except pershare amounts started 69 percent 2017 gradually declined 45 percent 2025 beyond annual increase companys premedicare medical contributions main us plan upon retirement capped 4 percent 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans plan assets investment strategy fair value measurements company’s pension plans 2017 2016 adjusted conform 2017 presentation investments measured net asset value nav us equities include investments company’s common stock amount 12 december 31 2017 12 december 31 2016 collective trustsmutual funds us plans entirely index funds international plans mostly unit trust index funds certain international fixed income investments previously disclosed government corporate reclassified collective trustsmutual funds conform 2017 presentation mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based thirdparty appraisals occur least year property portfolio alternative investments focus marketneutral strategies low expected correlation traditional asset classes “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts level 3 investments privateequity limited partnerships nav notes consolidated financial statements millions dollars except pershare amounts effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined 2015 2016 adjusted conform 2017 presentation primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 90 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys benefit plan investment committee established following approved asset allocation ranges equities 3060 percent fixed income cash 2065 percent real estate 015 percent alternative investments 015 percent uk pension plan uk board trustees established following asset allocation guidelines equities 3050 percent fixed income cash 3570 percent real estate 515 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety factors including market conditions illiquidity constraints mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2017 company contributed 728 252 us international pension plans respectively 2018 company expects contributions approximately 700 us plans 250 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments tax law changes economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying opeb benefits approximately 174 2018 151 paid 2017 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 316 281 316 2017 2016 2015 respectively notes consolidated financial statements millions dollars except pershare amounts benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2017 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2017 2016 trust assets 35 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 936 662 690 2017 2016 2015 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 22 beginning page 81 note 24 properties plant equipment1 united states australia nigeria country accounted 10 percent company’s net properties plant equipment ppe 2017 australia ppe 55514 53962 49205 2017 2016 2015 respectively nigeria ppe 17076 17922 18773 2017 2016 2015 respectively net dry hole expense related prior years’ expenditures 42 175 1573 2017 2016 2015 respectively depreciation expense includes accretion expense 668 749 715 2017 2016 2015 respectively impairments 1021 3186 4066 2017 2016 2015 respectively note 25 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 18 beginning page 75 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return discussed note 18 beginning page 75 company received adverse decision april 21 2017 regarding interest rate applied certain chevron intercompany loans august 14 2017 agreement reached australian taxation office settle dispute management believes agreed terms reasonable resolution dispute material impact 2017 results company settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination notes consolidated financial statements millions dollars except pershare amounts guarantees company two guarantees equity affiliates totaling 1082 amount 712 associated financing arrangement equity affiliate approximate 4year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 370 associated certain payments terminal use agreement entered equity affiliate approximate 10year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2018 1402 2019 1367 2020 1027 2021 920 2022 555 2023 2566 portion commitments may ultimately shared project partners total payments agreements approximately 1300 2017 1300 2016 1900 2015 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various operating closed divested sites including limited federal superfund sites analogous sites state laws refineries chemical plants marketing facilities crude oil fields mining sites although company provided known environmental obligations probable reasonably estimable likely company continue incur additional liabilities amount additional future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity chevron’s environmental reserve december 31 2017 1429 included balance 269 related remediation activities approximately 146 sites company identified potentially responsible party provisions federal superfund law analogous state laws provide joint several liability responsible parties future actions regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2017 environmental reserves balance 1160 781 related company’s us downstream operations 38 international downstream operations 340 upstream operations 1 businesses liabilities sites primarily associated company’s plans activities remediate soil groundwater contamination company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2017 recorded liability material company’s results operations consolidated financial position liquidity refer note 26 page 89 discussion company’s asset retirement obligations notes consolidated financial statements millions dollars except pershare amounts contingencies chevron receives claims submits claims customers trading partners joint venture partners us federal state local regulatory bodies governments contractors insurers suppliers individuals amounts claims individually aggregate may significant take lengthy periods resolve may result gains losses future periods company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result significant gains losses future periods note 26 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2017 2016 2015 table amount associated revisions estimated cash flows 2017 reflects increased cost estimates abandon wells equipment facilities longterm portion 14214 balance end 2017 13228 note 27 financial information earnings 2017 included aftertax gains approximately 1800 relating sale certain properties amount approximately 850 950 related downstream upstream respectively earnings 2016 included aftertax gains approximately 800 relating sale certain properties approximately 600 200 related downstream upstream assets respectively earnings 2017 included aftertax charges approximately 900 impairments asset writeoffs related upstream earnings 2016 included aftertax charges approximately 2900 impairments asset writeoffs related upstream 110 related downstream includes 45 1 344 2017 2016 2015 respectively company’s share equity affiliates’ foreign currency effects company 4531 goodwill consolidated balance sheet upstream segment related primarily 2005 acquisition unocal company tested goodwill impairment 2017 impairment required fiveyear financial summary unaudited supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions table costs incurred exploration property acquisitions development1 supplemental information oil gas producing activities unaudited development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 16 beginning page 70 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2017 2016 2015 shown following table net income loss exploration production activities reported page 68 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page 68 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 26 “asset retirement obligations” page 89 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 26 “asset retirement obligations” page 89 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved reserves probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager global reserves organization separate upstream operating organization manager global reserves 30 years’ experience working oil gas industry holds undergraduate graduate degrees geoscience experience includes various technical management roles providing reserve resource estimates support major capital exploration projects 10 years managing oil gas supplemental information oil gas producing activities unaudited reserves processes named distinguished lecturer american association petroleum geologists active member american association petroleum geologists sepm society sedimentary geologists society petroleum engineers rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain global reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance global reserves manual addition thirdparty engineering consultants used supplement company’s reserves estimation controls procedures including use thirdparty audits selected oil gas assets technologies used establishing proved reserves additions 2017 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves end 2017 proved undeveloped reserves totaled 43 billion barrels oilequivalent boe increase 721 million boe yearend 2016 increase due 736 million boe extensions discoveries 366 million boe revisions 39 million boe acquisitions 5 million boe improved recovery partially offset transfer 419 million boe proved developed 6 million boe sales major portion reserve increase attributed companys activities midland delaware basins 2017 investments totaling approximately 91 billion oil gas producing activities 01 billion nonoil gas producing activities expended advance development proved undeveloped reserves asia expenditures year totaled approximately 40 billion primarily related development projects tco affiliate kazakhstan united states accounted 33 billion related primarily various development activities gulf mexico midland delaware basins africa 07 billion expended various offshore development natural gas projects nigeria angola republic congo development activities canada primarily responsible 08 billion expenditures americas reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2017 company held approximately 23 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 600 million boe remained undeveloped five years related gorgon wheatstone projects company completed construction liquefaction facilities develop natural gas field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion africa approximately 400 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos supplemental information oil gas producing activities unaudited gas projects nigeria affiliates account 14 billion boe proved undeveloped reserves 10 billion boe remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2017 increases commodity prices positively impacted economic limits oil gas properties resulting proved reserve increases negatively impacted proved reserves due entitlement effects yearend reserves volumes updated circumstances significant changes discussed appropriate reserves sections 2017 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 32 percent 38 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities three years ending december 31 2017 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2017 proved reserves company 117 billion boe company’s estimated net proved reserves liquids including crude oil condensate natural gas liquids synthetic oil years 2015 2016 2017 shown table page 98 company’s estimated net proved reserves natural gas shown page 99 noteworthy changes liquids proved reserves 2015 2017 discussed shown table following page revisions 2015 entitlement effects improved performance responsible the163 million barrel increase tco affiliate kazakhstan asia entitlement effects drilling performance across numerous assets resulted 164 million barrel increase improved field performance various nigerian fields including agbami primarily responsible 60 million barrel increase africa synthetic oil reserves canada increased 80 million barrels primarily due entitlement effects 2016 entitlement effects mainly responsible 64 million barrel increase tco affiliate kazakhstan improved field performance various gulf mexico fields including jackst malo san joaquin valley primarily responsible 109 million barrel increase united states asia entitlement effects drilling improved performance across numerous assets resulted 50 million barrel increase 2017 improved field performance various gulf mexico fields including jackst malo tahiti midland delaware basins primarily responsible 280 million barrel increase united states improved field performance various fields including agbami sonam nigeria responsible 79 million barrel increase africa synthetic oil reserves canada decreased 42 million barrels primarily due entitlement effects tco affiliate kazakhstan entitlement effects mainly responsible 53 million barrel decrease improved recovery 2016 improved recovery increased reserves 293 million barrels primarily due future growth project tco affiliate kazakhstan extensions discoveries 2015 extensions discoveries midland delaware basins primarily responsible 137 million barrel increase united states 2016 extensions discoveries midland delaware basins primarily responsible 131 million barrel increase united states 2017 extensions discoveries midland delaware basins gulf mexico primarily responsible 458 million barrel increase united states extensions discoveries duvernay shale canada primarily responsible 74 million barrel increase americas purchases 2017 purchases 33 million barrels asia due contract extension azerichiraggunashli fields azerbaijan sales 2016 sales 34 million barrels united states primarily gulf mexico shelf supplemental information oil gas producing activities unaudited 2017 sales 57 million barrels united states primarily gulf mexico shelf midland delaware basins net proved reserves crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 234 169 155 south america 63 54 81 2017 2016 2015 respectively reserves associated canada ending reserve balances africa 26 31 34 south america 78 87 97 2017 2016 2015 respectively included yearend reserve quantities related productionsharing contracts psc refer page e8 definition psc pscrelated reserve quantities 15 percent 19 percent 20 percent consolidated companies 2017 2016 2015 respectively supplemental information oil gas producing activities unaudited net proved reserves natural gas ending reserve balances north america south america 478 172 174 317 475 540 2017 2016 2015 respectively ending reserve balances africa south america 899 939 1044 140 147 179 2017 2016 2015 respectively total “as sold” volumes 1995 1744 1742 2017 2016 2015 respectively includes reserve quantities related productionsharing contracts psc refer page e8 definition psc pscrelated reserve quantities 12 percent 15 percent 16 percent consolidated companies 2017 2016 2015 respectively noteworthy changes natural gas proved reserves 2015 2017 discussed shown table revisions 2015 positive drilling performance wheatstone gorgon responsible 974 bcf increase australia net revisions 480 bcf asia primarily due improved field performance thailand entitlement effects improved performance kazakhstan majority net decrease 435 bcf americas due deferral infill drilling compression projects well drilling results trinidad tobago 218 bcf increase tco affiliate due entitlement effects improved performance 2016 development activities primarily wheatstone responsible 853 bcf increase australia net revisions 443 bcf asia primarily due improved field performance china thailand 2017 reservoir performance new seismic data greater gorgon area primarily responsible 15 tcf increase australia improved performance midland delaware basins primarily responsible 670 bcf increase united states sonam field nigeria primarily responsible 184 bcf increase africa extensions discoveries 2015 extensions discoveries 659 bcf united states primarily appalachian region midland delaware basins 2016 extensions discoveries 388 bcf united states primarily appalachian region midland delaware basins 2017 extensions discoveries 14 tcf united states primarily appalachian region midland delaware basins extensions discoveries duvernay shale canada primarily responsible 319 bcf increase americas supplemental information oil gas producing activities unaudited sales 2016 sales 544 bcf united states primarily gulf mexico shelf michigan midcontinent region 2017 sales 177 bcf united states primarily midland delaware basins sale companys interests trinidad tobago primarily responsible 129 bcf decrease americas table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations includes costs retire existing wells facilities addition future wells facilities necessary produce proved undeveloped reserves estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows conforms 2017 presentation supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” conforms 2017 presentation part iv item 15 item 7 managements discussion analysis financial condition results operations indexes financial statements supplementary data managements discussion analysis financial condition results operations presented page 41 annual report form 10k item 8item 7 managements discussion analysis financial condition results operations indexes financial statements supplementary data managements discussion analysis financial condition results operations presented page 34 annual report form 10k item 8item 7 managements discussion analysis financial condition results operations index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 8item 7 managements discussion analysis financial condition results operations index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 8item 7 management’s discussion analysis financial condition results operations index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 7aitem 7 management’s discussion analysis financial condition results operation index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page 27 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page 27 item 7aitem 7 managements discussion analysis financial condition results operations indexes financial statements supplementary data managements discussion analysis financial condition results operations presented page 39 annual report form 10k item 8item 7 managements discussion analysis financial condition results operations index financial statements supplementary data managements discussion analysis financial condition results operations presented page 35 annual report form 10k item 8item 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page fs1 item 7aitem 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page 30 item 7aitem 7 managements discussion analysis financial condition results operations index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 8item 7 managements discussion analysis financial condition results operations index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 8item 7 management’s discussion analysis financial condition results operations index management’s discussion analysis financial condition results operations consolidated financial statements supplementary data presented page 29 item 7a nannannannanitem 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained pages fs9 fs10 management’s discussion analysis financial condition results operations “financial instruments” note 10 consolidated financial statements “financial derivative instruments” beginning page fs27 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs11 note 9 consolidated financial statements “financial derivative instruments” beginning page fs30 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs15 note 8 consolidated financial statements “financial derivative instruments” beginning page fs33 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs14 note 8 consolidated financial statements “financial derivative instruments” beginning page fs35 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs17 note 7 consolidated financial statements “financial derivative instruments” beginning page fs39 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs15 note 7 consolidated financial statements “financial derivative instruments” beginning page fs37 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs14 note 7 consolidated financial statements “financial derivative instruments” beginning page fs36 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs13 note 7 consolidated financial statements “financial derivative instruments” beginning page fs36 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs14 note 10 consolidated financial statements “financial derivative instruments” beginning page fs39 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs13 note 10 consolidated financial statements “financial derivative instruments” beginning page fs36 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs14 note 9 consolidated financial statements “financial derivative instruments” beginning page fs35 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” beginning page fs13 note 10 consolidated financial statements “financial derivative instruments” beginning page fs34 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” page fs15 note 10 consolidated financial statements “financial derivative instruments” beginning page fs35 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” page fs15 note 10 consolidated financial statements “financial derivative instruments” beginning page fs35 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” page fs16 note 11 consolidated financial statements “financial derivative instruments” beginning page fs38 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” beginning page 41 note 9 consolidated financial statements “financial derivative instruments” beginning page 64 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” beginning page 42 note 8 consolidated financial statements “financial derivative instruments” beginning page 66 item 8nannanitem 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instruments” beginning page fs15 note 10 consolidated financial statements “financial derivative instruments” beginning page fs39 item 8item 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” beginning page 47 note 8 consolidated financial statements “financial derivative instruments” beginning page 72 item 8nannanitem 7a quantitative qualitative disclosures market risk company’s discussion interest rate foreign currency commodity price market risk contained management’s discussion analysis financial condition results operations “financial derivative instrument market risk” page 43 note 11 consolidated financial statements “financial derivative instruments” beginning page 65 item 8 item 8 financial statements supplementary data indexes financial statements supplementary data managements discussion analysis financial condition results operations presented page 41 annual report form 10k item 9item 8 financial statements supplementary data indexes financial statements supplementary data managements discussion analysis financial condition results operations presented page 34 annual report form 10k item 9item 8 financial statements supplementary data index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page 27 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page 27 item 9item 8 financial statements supplementary data indexes financial statements supplementary data managements discussion analysis financial condition results operations presented page 39 annual report form 10k item 9item 8 financial statements supplementary data index financial statements supplementary data managements discussion analysis financial condition results operations presented page 35 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page fs1 item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page 30 item 9item 8 financial statements supplementary data index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index financial statements supplementary data managements discussion analysis financial condition results operations presented page fs1 annual report form 10k item 9item 8 financial statements supplementary data index management’s discussion analysis consolidated financial statements supplementary data presented page 29 item 9 nannannannannanitem 15 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements 2 financial statement schedules included page 30 annual report form 10k financial statement schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k filed company november 20 2002 report chevrontexaco filed press release dated november 19 2002 announcing company amended rights agreement dated november 23 1998 amended chevrontexaco mellon investor services llc rights agent rights agreement amended chevrontexaco’s series preferred stock purchase rights expire november 23 2003 five years earlier november 23 2008 initial expiration date agreement 2 current report form 8k filed company january 31 2003 report chevrontexaco filed press release announcing preliminary unaudited fourth quarter 2002 net income 904 million 3 current report form 8k filed company february 18 2003 report included second supplemental indenture among chevrontexaco capital company issuer chevrontexaco corporation guarantor jpmorgan chase bank trustee dated february 12 2003 schedule ii valuation qualifying accounts millions see also note 15 consolidated financial statements page fs37 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 17th day march 2003 chevrontexaco corporation david j o’reilly david j o’reilly chairman board pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 17th day march 2003 principal executive officers directors david j o’reilly david j o’reilly chairman board peter j robertson peter j robertson vice chairman board principal financial officer john watson john watson vice president finance chief financial officer principal accounting officer stephen j crowe stephen j crowe vice president comptroller samuel h armacost samuel h armacost robert j eaton robert j eaton sam ginn sam ginn carla hills carla hills franklyn g jenifer franklyn g jenifer j bennett johnston j bennett johnston sam nunn sam nunn charles r shoemate charles r shoemate frank shrontz frank shrontz thomas vanderslice thomas vanderslice carl ware carl ware lydia beebe lydia beebe attorneyinfact john young john young certifications david j o’reilly certify 1 reviewed annual report form 10k chevrontexaco corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses david j o’reilly david j o’reilly chairman board chief executive officer date march 17 2003 john watson certify 1 reviewed annual report form 10k chevrontexaco corporation 2 based knowledge annual report contain untrue statement material fact omit state material fact necessary make statements made light circumstances statements made misleading respect period covered annual report 3 based knowledge financial statements financial information included annual report fairly present material respects financial condition results operations cash flows registrant periods presented annual report 4 registrant’s certifying officer responsible establishing maintaining disclosure controls procedures defined exchange act rules 13a14 15d14 registrant designed disclosure controls procedures ensure material information relating registrant including consolidated subsidiaries made known us others within entities particularly period annual report prepared b evaluated effectiveness registrant’s disclosure controls procedures date within 90 days prior filing date annual report “evaluation date” c presented annual report conclusions effectiveness disclosure controls procedures based evaluation date 5 registrant’s certifying officer disclosed based recent evaluation registrant’s auditors audit committee registrant’s board directors persons performing equivalent function significant deficiencies design operation internal controls could adversely affect registrant’s ability record process summarize report financial data identified registrant’s auditors material weaknesses internal controls b fraud whether material involves management employees significant role registrant’s internal controls 6 registrant’s certifying officer indicated annual report whether significant changes internal controls factors could significantly affect internal controls subsequent date recent evaluation including corrective actions regard significant deficiencies material weaknesses john watson john watson vicepresident finance chief financial officer date march 17 2003 index management’s discussion analysis consolidated financial statement supplementary data fs1 part item 1 business general development business capital exploratory expenditures petroleum exploration production liquids natural gas production acreage reserves contract obligations development activities exploration activities review ongoing exploration production activities key areas petroleum natural gas natural gas liquids petroleum refining petroleum refined products marketing petroleum transportation chemicals coal activities synthetic crude oil power gasification research technology environmental protection web site access sec reports compliance certification requirements item 2 properties item 3 legal proceedings item 4 submission matters vote security holders part ii item 5 market registrant’s common equity related stockholder matters item 6 selected financial data item 7 management’s discussion analysis financial condition results operations item 7a quantitative qualitative disclosures market risk item 8 financial statements supplementary data item 9 changes disagreements accountants accounting financial disclosure part iii item 10 directors executive officers registrant item 11 executive compensation item 12 security ownership certain beneficial owners management item 13 certain relationships related transactions item 14 controls procedures part iv item 15 exhibits financial statement schedules reports form 8k schedule ii valuation qualifying accounts millions signatures management’s discussion analysis financial condition results operations report independent accountants consolidated statement income consolidated statement comprehensive income consolidated balance sheet consolidated statement cash flows consolidated statement stockholders’ equity notes consolidated financial statements quarterly results stock market data fiveyear financial summary supplemental information oil gas producing activities exhibit index form 10k exhibit 32 exhibit 1012 exibit 121 exhibit 211 exhibit 231 exhibit 232 exhibit 241 exhibit 242 exhibit 243 exhibit 244 exhibit 245 exhibit 246 exhibit 247 exhibit 248 exhibit 249 exhibit 2410 exhibit 2411 exhibit 2412 exhibit 2413 exhibit 2414 exhibit 2415 exhibit 2416 exhibit 991 management’s discussion analysis financial condition results operations key financial results chevron corporation dividend premerger summary company’s net income major operating area follows net income loss major operating area net income period presented includes amounts matters management characterizes “special items” described table special items nature sufficiently large amounts special items table identified separately help explain changes net income segment income periods well help distinguish underlying trends company’s businesses categories “mergerrelated expenses” “extraordinary loss mergerrelated asset sales” amounts 2001 2002 described detail “texaco merger transaction” section page fs3 special items discussed detail major operating area “results operations” section beginning page fs4 business environment outlook shown “special items” table large specialitem charges adversely affected net income 2002 2001 2002 23 billion 33 billion net charges related company’s investment dynegy inc affiliate refer pages fs7 fs8 discussion matters approximately one half 35 billion net charges 2001 related asset impairments primarily result downward revisions crude oil natural gas reserve quantities items discussed us international exploration production analyses segment income beginning page fs4 major charges earnings 2002 2001 related texaco merger transaction discussed page fs3 apart effects special items chevrontexaco’s earnings depend largely profitability upstream exploration production downstream refining marketing transportation businesses overall earnings trends typically less affected results company’s commodity chemicals sector investments businesses key components company’s competitive position particularly given capitalintensive infrastructure commoditybased nature many products ability invest capital projects provide adequate financial returns managing operating expenses successfully company also continuously evaluates opportunities acquire assets operations complementary asset base help sustain company’s growth 2003 company intends evaluate determine assets overall postmerger portfolio key providing longterm value accordingly certain asset dispositions may result comments related earnings trends company’s major business areas follows upstream yeartoyear changes exploration production earnings align closely industry price levels crude oil natural gas crude oil natural gas prices subject certain external factors company control including product demand connected global economic conditions industry inventory levels weatherrelated damages disruptions competing fuel prices regional supply interruptions may caused military conflicts political uncertainty longerterm trends earnings segment also function range factors addition price trends including company’s ability find acquire reserves efficiently produce average worldwide industry prices crude oil 2002 little changed 2001 however company’s average natural gas realization united states fell one third prior year contributed decline company’s us segment income periods segment income 2002 fs2 international operations reflected relatively little change prices crude oil natural gas 2002 industry price levels crude oil trended upward 20 perbarrel level 30 early march 2003 spot price west texas intermediate wti benchmark crude oil quoted 35 40 per barrel 12year high benchmark prices henry hub us natural gas started 2002 low2 range per thousand cubic feet also trended upward year 5 level midmarch 2003 benchmark natural gas price volatile averaged 7 per thousand cubic feet period relatively strong prices crude oil early 2003 part reflected geopolitical uncertainty iraq venezuela higher us natural gas price primarily attributable falling inventory storage levels reflecting withdrawals meet demands cold winter much united states segment income 2002 also dampened lower worldwide oilequivalent production 3 percent 2001 levels part production decline result opec quotas accounted decrease nigeria 30000 barrels crude oil per day 2002 storms gulf mexico reduced 2002 oilequivalent production 20000 barrels per day impact revised terms productionsharing contract indonesia lowered 2002 net oilequivalent production 25000 barrels per day absent effects worldwide oilequivalent production level years expected production level 2003 beyond uncertain part possibility additional quota adjustments opec potential local civil unrest changing geopolitics could cause production disruptions capital expenditures weighted heavily international areas due greater number economic opportunities downstream refining marketing transportation earnings closely tied regional demand industry refining marketing margins companyspecific factors influencing company’s profitability segment include operating efficiencies refinery network including downtime due operating incidents maintenance industry margins worldwide strong early part 2001 trended downward worldwide year worldwide demand refined products weakened early 2002 chevrontexaco margins lowest levels since mid1990s weak market conditions would allow feedstock costs fully recovered consumers refined products result worldwide earnings plummeted 2001 2002 breakeven additionally decline earnings 2001 included absence ongoing earnings us downstream assets sold condition merger early 2003 us refined products margins strengthened combined effects general strike venezuela colderthannormal winter weather low inventory levels based current industry economic conditions company expect rebound earnings segment 2003 levels similar 2001 2000 chemicals earnings company’s oronite subsidiary improved 2002 losses 50 percentowned chevron phillips chemical co llc affiliate lower demand margins commodity chemicals low levels protracted period significant improvement expected near future texaco merger transaction basis presentation october 9 2001 texaco inc texaco became wholly owned subsidiary chevron corporation chevron pursuant merger transaction chevron changed name chevrontexaco corporation certain operations jointly owned combining companies consolidated accompanying financial statements operations primarily caltex group companies previously owned 50 percent chevron texaco combination accounted pooling interests accompanying audited consolidated financial statements periods presented chevron texaco always combined merger effects mandate federal trade commission ftc condition ftc approval merger company sold interests equilon motiva joint ventures engaged us downstream businesses february 2002 resulting cash proceeds 22 billion including dividends due indemnification chevrontexaco certain equilon motiva contingent liabilities date sale discussed “guarantees offbalancesheet arrangements contractual obligations contingencies” section beginning page fs10 mandated asset dispositions also completed 2002 net income cash proceeds sales material net income 2001 assets sold condition merger approximately 375 million net loss assets sold ftc mandate presented 2001 income statement extraordinary item company incurred beforetax mergerrelated expenses 1563 billion 1136 billion tax 576 million 386 million tax 2001 2002 respectively major expenses included employee severance payments incremental pension medical plan benefit costs associated workforce reductions legal accounting securities exchange commission sec filing investment banker fees employee office relocations costs elimination redundant facilities operations significant mergerrelated expenses anticipated 2003 included mergerrelated expenses accruals 891 million 60 million 2001 2002 respectively severancerelated benefits approximately 4500 employees mergerrelated expenses benefit future operations activity accrual balance summarized table 4500 employees terminated approximately 450 remained payroll december 31 2002 yearend 2002 accrual balance expected extinguished approximately two years reflecting severance payment deferral option exercised employees fs3 operating developments operating developments events 2002 early 2003 included worldwide oil gas reserves production company added approximately 11 billion barrels oilequivalent reserves 2002 additions equated 114 percent production year included nearly 600 million barrels oilequivalent major discoveries extensions africa australia europe china additionally 500 million barrels added improved recovery expansion projects primarily africa eurasia california worldwide oilequivalent production declined 2002 3 percent compared 2001 4 percent compared 2000 decreases years reflect lower us production levels partially offset increased international production us gulf mexico two deepwater discoveries made tahiti great white process evaluated chevrontexaco 58 percent interest operates tahiti prospect company onethird nonoperated interest great white december company submitted application construct operate port pelican liquefied natural gas lng receiving regasification terminal located approximately 50 miles offshore gulf mexico phase 1 project designed process 800 million cubic feet natural gas per day connect existing infrastructure along gulf coast chevrontexaco’s interest 100 percent lng projects like port pelican help offset effect expected longterm decline industry’s us natural gas production angola eighth ninth discoveries gabela negage announced chevrontexacooperated deepwater block 14 latest discoveries followed geological engineering studies assess reserve potential company operator holds 31 percent interest block 14 nigeria second oil discovery usan made nonoperated deepwater nigeria block opl 222 company holds 30 percent interest prospect approximately 60 miles offshore water depth greater 2000 feet company also confirmed deepwater block opl 213 aparo oil discovery 100 percent company interest successful appraisal well aparo discovery shares structure adjacent concession likely become part joint oil development uk north sea company announced first oil alba extreme south latest phase field’s development chevrontexaco operator 21 percent interest phased development expansion expected nearterm add 50000 barrels oil per day alba production 100 percent field basis offsetting existing production declines maintaining plateau rate 100000 barrels oil per day caledonia field produced first oil february 2003 total production expected average 10000 barrels crude oil per day 2003 chevrontexaco operator 27 percent interest tengiz following delay late 2002 tengizchevroil tco announced early 2003 partners approved detailed engineering construction second generation program sour gas injection project two projects expected increase tco’s oil production capacity current rate 285000 barrels per day 430000 500000 barrels per day current development plans call two projects completed mid2006 chevrontexaco 50 percent ownership interest tco australia people’s republic china selected north west shelf venture chevrontexaco onesixth interest sole supplier lng proposed guangdong lng project southern china conditional 25year lng sale purchase agreement 39 trillion cubic feet natural gas equivalent 400 million cubic feet per day signed october china company entered unitization agreement china national offshore oil corp cnooc october jointly develop bozhong field bohai bay first unitization agreement cnooc foreign partner chevrontexaco holds approximate 16 percent interest us refining expansion project produce low sulfur motor gasoline diesel company’s pascagoula mississippi refinery become operational first quarter 2003 chemicals qatar worldscale olefins polyolefins complex currently commissioned facility owned operated qatar chemical company joint venture chevron phillips chemical company llc cpchem company’s 50 percentowned petrochemical affiliate partner qatar general petroleum cpchem signed agreements develop second petrochemical complex qatar project include worldscale olefins facility along derivatives units final approvals anticipated mid2004 us natural gas marketing company’s natural gas purchase sale agreements 26 percentowned dynegy affiliate terminated end january 2003 transition arrangements dynegy act agency role company contracts become managed chevrontexaco natural gas new wholesale natural gas marketing unit expected fully operational april 2003 contract terminations followed dynegy’s decision exit gas trading marketing business part companywide restructuring plan see page fs8 information related company’s investment dynegy results operations major business areas following section presents results operations company’s business segments well departments companies managed corporate level aid understanding changes segment income periods discussion two parts first underlying trends second special items tended obscure trends us exploration production segment income 2002 reflected significantly lower natural gas realizations 11 percent decrease natural gas production also contributing earnings decline lower liquids production dropped 2 percent 2001 levels lower earnings 2001 2000 partially resulted significantly lower liquids realizations lower oilequivalent production offset higher natural gas prices fs4 average natural gas realization 289 per thousand cubic feet 2002 compared 438 387 2001 2000 respectively company’s average 2002 us liquids realization 2134 per barrel compared 2133 2001 2561 2000 net oilequivalent production averaged 1002 million barrels per day 2002 6 percent 2001 13 percent 2000 net liquids component 2002 averaged 602000 barrels per day 2 percent 2001 10 percent 2000 net natural gas production averaged 24 billion cubic feet per day 2002 11 percent 2001 17 percent 2000 company’s 2002 production crude oil natural gas constrained tropical storms occurred september october gulf mexico storms reduced company’s 2002 oilequivalent production 20000 barrels per day split equally liquids natural gas negative impact company’s net income 100 million including casualty losses uninsured portion property damages associated costs addition impacts storms 2002 production lower oilequivalent production reflected normal field declines absence production assets sold 2001 partially offset new enhanced production deepwater areas gulf mexico reductions net natural gas production reflected part steep decline rates areas gulf mexico shelf brought onto production late 2000 early 2001 take advantage period high natural gas prices special items three years included asset writeoffs revaluations resulting mainly asset impairments caused writedowns proved oil gas reserve quantities various fields 2001 10 billion impairment recorded midway sunset field california’s san joaquin valley upon determining lowerthanprojected oil recovery field’s steaminjection process international exploration production earnings improvement 2002 versus 2001 marginally affected combination higher liquids realizations natural gas production lower exploration income tax expense offset part lower liquids production natural gas realizations higher depreciation expense earnings decline 2001 versus 2000 reflected lower average liquids realizations effect partially offset 3 percent increase oilequivalent production higher natural gas prices average liquids realization including equity affiliates 2306 per barrel 2002 compared 2217 2001 2604 2000 average natural gas realization 214 per thousand cubic feet 2002 compared 236 2001 209 2000 daily net liquids production 1295 million barrels 2002 decreased 4 percent 1345 million barrels 2001 3 percent 1330 million barrels 2000 production decreases 2002 indonesia primarily due changes contractual terms nigeria primarily due opec constraints slightly offset increased production kazakhstan 2001 increases kazakhstan offset lower volumes indonesia net natural gas production 1971 billion cubic feet per day 2002 15 percent 2001 26 percent 2000 major factor 2002 production increase full year new production malampaya field philippines geographic areas production increases kazakhstan nigeria australia increases slightly offset lower production mature fields canada 2001 areas production increases kazakhstan trinidad tobago south korea canada specialitem charges 2002 asset writeoffs revaluations asset impairments associated writedowns quantities proved oil gas reserves fields africa canada special items 2001 included 247 million impairment ll652 field venezuela slowerthanexpected reservoir repressurization resulted reduction projected volumes oil recoverable company’s remaining contract period operation us refining marketing transportation us refining marketing transportation segment loss 2002 primarily result significantly lower refined product margins results 2001 2000 included earnings 375 million 215 million respectively associated assets sold condition merger included company’s equilon motiva joint ventures addition sales volumes operations retained following merger 2002 primarily due lower fuel oil trading activity jet fuel sales volumes decline jet fuel sales volumes reflected weakened travel industry earnings increase 2001 reflected significantly higher gasoline sales margins especially early year partially offset weaker distillate sales margins higher operating expenses higher sales volumes also contributed improvement 2001 excluding company’s share sales volumes associated assets sold condition merger refined products sales volumes 1610 million barrels per day 2002 decreased 4 percent 2001 2 percent 2000 average us refined products sales realization 3433 per barrel 2002 2001 average 3626 per barrel 3932 per barrel 2000 special items 2002 included environmental remediation provisions asset writedowns certain refining marketing assets 57 million charge connected lawsuit related groundwater contamination caused mtbe methyl tertiary butyl ether additive used manufacture certain gasoline fs5 selected operating data mbpd thousands barrels per day mmcfpd millions cubic feet per day bbl barrel mcf thousands cubic feet 1 includes equity affiliates except explained footnote 3 2 represents total field production boscan operating service agreement venezuela 2000 included colombian operating service agreement 3 excludes equilon motiva premerger international refining marketing transportation international refining marketing transportation segment includes company’s consolidated refining marketing businesses international marine operations international supply trading activities equity earnings affiliates primarily asiapacific region earnings 2002 included foreign currency losses 176 million compared gains 23 million 107 million 2001 2000 respectively currency losses 2002 occurred mainly brazil new zealand australia south korea united kingdom income company’s operating areas declined 2002 exception latin america earnings increased areas lower earnings supplydemand fundamentals allow immediate recovery rising crude oil costs marketplace product price changes lagging feedstock costs condition reflected weak demand stiff competition areas regulated price environments lower refining margins 2002 reflected continued excess refining capacity regions improved results latin america 2002 primarily reduced operating expenses offset slightly lower product margins lower volumes results company’s international shipping operations also declined 2002 compared 2001 primarily lower freight rates excluding effects foreign currency gains 2001 2000 segment whole results 2001 significantly improved marketing margins particularly early year partially offsetting marketing improvement higher operating costs somewhat lower refining margins total international refined products sales volumes 2258 million barrels per day 2002 8 percent 2454 million 2001 10 percent 2521 million 2000 weak economic conditions continued dampen demand 2002 special item amount 2002 writedown company’s investment publicly traded caltex australia affiliate fair value result protracted weak business conditions australian downstream markets writedown based management’s judgment decline investment’s fair value carrying value deemed temporary special items 2001 included impairment refinery assets central america special item asset writeoffs revaluations 2000 included impairments marketing assets eastern europe central america chemicals includes company’s oronite subsidiary petrochemicals business prior contribution cpchem july 2000 equity earnings cpchem date results years reflect protracted period generally weak demand commodity chemicals industry overcapacity results cpchem company’s oronite subsidiary improved 2002 primarily lower feedstock utility costs special items 2001 2000 included writedowns cpchem puerto rico operations special items 2002 fs6 consists company’s equity interest dynegy coal mining operations power gasification ventures worldwide cash management debt financing activities corporate administrative costs insurance operations real estate activities technology companies aside effect special items change 2001 2002 reflected primarily favorable effect lower corporate charges including increase favorable tax adjustments 245 million lower net interest expense 71 million offset part decline company’s share dynegy’s operating results 2002 dynegy results severely affected downturn energy merchant sector characterized lower liquidity levels reduced power prices credit concerns special items 2002 included 2306 billion related dynegy composed 1626 billion writedown company’s investment dynegy common preferred stock estimated fair values 680 million company’s share items dynegy classified special asset writedowns revaluations loss asset sale refer page fs8 information relating company’s investments dynegy consolidated statement income following table amounts special items income statement category shown assist explanation changes categories periods addition effects special items shown table separately disclosed face consolidated income statement mergerrelated expenses writedowns investments equity affiliates extraordinary aftertax loss sale assets mandated condition merger matters discussed elsewhere discussion note 2 consolidated financial statements page fs27 explanations provided variations years amounts table consideration effects special items well income statement categories sales operating revenues 99 billion 2002 compared 104 billion 2001 117 billion 2000 revenues worldwide upstream operations decreased 27 percent lower prices natural gas particularly united states sales volumes natural gas also united states downstream sales operating revenues 6 percent higher 2002 primarily higher prices refined products fourth quarter 2002 total sales operating revenues 2001 declined 2000 lower average realizations crude oil refined products income equity affiliates declined 2002 reflecting absence earnings assets sold condition merger lower earnings dynegy equity income increased marginally 2001 strength improved earnings equilon motiva dynegy partially offset lower earnings tco lgcaltex larger losses cpchem income decreased 2002 result lower interest income changes net foreign exchange gains losses net gains losses asset sales foreign currency losses 2002 43 million compared gains 191 million 182 million 2001 2000 respectively 2002 net gains fluctuations us dollar argentine peso began float dollar year offset losses related currencies countries company significant operations purchased crude oil products costs 57 billion 2002 5 percent lower 2001 primarily due lower natural gas prices sales volumes 18 percent lower 2000 primarily due lower crude oil natural gas prices lower natural gas volumes fs7 operating selling general administrative expenses benefited merger synergy savings substantially offset increases related pension expense payroll employee benefits exploration expenses 06 billion 2002 compared 10 billion 2001 09 billion 2000 2002 well writeoffs exploration expenses 358 million 90 million lower respectively compared 2001 reduced expenses 2002 reflect part highgrading company’s exploration portfolio following merger 2001 well writeoffs 184 million higher compared 2000 offset declines exploration expenses depreciation depletion amortization expense increased international upstream operations 2002 effect slightly offset lower expenses us upstream segment 2001 absence charges relating chemicals assets contributed cpchem joint venture formed mid2000 essentially offset increases amounts segments interest debt expense 06 billion 2002 compared 08 billion 2001 11 billion 2000 declines periods primarily reflected lower average interest rates debt income tax expense year corresponded effective tax rates 45 percent year taking account effect special items see also note 15 consolidated financial statements information related investment dynegy inc chevrontexaco owns approximately 26 percent common stock dynegy affiliate energy merchant engaged power generation natural gas liquids regulated energy delivery company also holds 15 billion aggregate principal amount dynegy preferred stock due redeemed par november 2003 result collapse us merchantenergy sector 2002 dynegy experienced significant reduction value common stock well marked reduction available liquidity resulted limited access dynegy capital markets increasing use assets collateral liabilities dynegy also subject regulatory investigations defendant number lawsuits seeking large damage amounts 2002 debt ratings dynegy securities downgraded investmentgrade level dynegy’s ability meet obligations timely fashion depends part completion announced plans recapitalization restructuring business company currently anticipate dynegy sufficient liquidity redeem preferred stock due chevrontexaco’s net income 2002 included special charges 2306 billion related dynegy charges composed 1626 billion company’s writedown combined investment dynegy common preferred stock 680 million company’s share dynegy’s special items year writedown company’s investments dynegy 2002 required declines fair values common preferred stock investments respective carrying values deemed temporary additional writedowns investments dynegy would required extent fair values dynegy securities end subsequent period respective carrying values time declines value deemed temporary event dynegy records losses future periods company’s share losses would recorded first remaining carrying value common stock carrying value preferred stock december 31 2002 remaining book value company’s investment dynegy 347 million composed 300 million preferred stock 47 million common stock market value chevrontexaco’s share dynegy common stock 114 million based equivalent closing market prices quoted market price exists preferred stock refer “dynegy preferred stock investment” page fs12 description methodology used estimate fair value december 31 2002 common preferred stock future declines fair value deemed temporary charge would recorded income however effect temporary decline increase fair value preferred stock would recorded “other comprehensive income” would recognized income time redemption disposition security event otherthantemporary decline fair value december 31 2002 carrying value common stock investment approximately 500 million company’s proportionate amount dynegy net equity difference accreted income estimated economic life underlying net assets absence future impairment investment request dynegy independent accountant conducting reaudit 19992001 financial statements resulted thus far certain restatements prior periods date chevrontexaco’s share known restatements material accordingly prior periods accompanying consolidated financial statements restated upon conclusion audit independent accountants perform reviews 2002 quarterly financial statements results audits reviews may require restatements dynegy chevrontexaco evaluate effects consolidated financial statements time liquidity capital resources cash equivalents marketable securities 38 billion 32 billion december 31 2002 2001 respectively cash provided operating activities 2002 99 billion compared 115 billion 2001 135 billion 2000 2002 decline cash provided operating activities mainly reflected lower earnings us upstream worldwide downstream businesses cash provided asset sales 23 billion 2002 03 billion 2001 12 billion 2000 february 2002 company received proceeds 22 billion including dividends due ftcmandated sale company’s investments equilon motiva 2002 proceeds cash provided operating activities generated sufficient funds company’s capital exploratory expenditure program payment dividends stockholders reduction overall debt levels fs8 dividends chevrontexaco made payments 2991 billion 2858 billion 2789 billion dividends distributions common stock preferred stock minority interests 2002 2001 2000 respectively debt lease minority interest obligations chevrontexaco’s total debt capital lease obligations 163 billion december 31 2002 174 billion yearend 2001 company also minority interest obligations 303 million 283 million december 31 2001 company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 95 billion december 31 2002 116 billion end 2001 totals 41 billion 32 billion reclassified longterm end period respectively settlement obligations expected require use working capital 2003 company intent ability evidenced committed credit facilities refinance longterm basis company’s practice continually refinance commercial paper maintaining levels believes appropriate yearend 2002 chevrontexaco 41 billion committed credit facilities various major banks permit refinancing shortterm obligations longterm basis facilities support commercial paper borrowings also used general credit requirements borrowings outstanding facilities year yearend 2002 company increased total value “shelf” registrations file securities exchange commission sec 20 billion 48 billion december 31 2002 company three existing effective shelf registrations file sec together would permit additional registered debt offerings aggregate 28 billion securities company issued 20 billion 35 percent guaranteed notes due 2007 shelf registration 2002 proceeds issue expected used retire commercial paper repayments longterm debt 2002 included 250 million texaco north sea uk notes 285 million texaco capital inc bonds 192 million new zealand debt 120 million philippine debt 114 south african debt 100 million chevrontexaco corporation 811 percent notes change longterm debt 2002 also included noncash reduction 100 million companyguaranteed employee stock ownership plan esop debt february 2003 company redeemed 200 million texaco capital inc bonds originally due 2033 shelf registration also february company issued 750 million 3375 percent bonds due february 2008 company plans use proceeds issuance pay outstanding commercial paper borrowings chevrontexaco’s senior debt rated aa standard poor’s corporation aa2 moody’s investor service bonds issued texaco inc rated aa3 chevrontexaco’s us commercial paper rated a1 standard poor’s prime 1 moody’s company’s canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions company believes substantial borrowing capacity meet unanticipated cash requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings pension obligations based expected changes plan asset values pension obligations 2003 company believe significant funding pension plans required year additional funding may ultimately required subsequent periods investment returns insufficient offset increases plans’ obligations refer also discussion pension accounting “application critical accounting policies” beginning page fs15 capital exploratory expenditures 2002 totaled 93 billion including company’s equity share affiliates’ expenditures capital exploratory expenditures 120 billion 2001 95 billion 2000 company’s equity share affiliates’ expenditures require cash outlays company 14 billion 17 billion 12 billion 2002 2001 2000 respectively expenditures 63 billion 2002 exploration production activities represented 68 percent total outlays 2002 compared 59 percent 2001 66 percent 2000 international exploration production spending 44 billion 70 percent worldwide exploration production expenditures 2002 compared 66 percent 2001 62 percent 2000 reflecting company’s continuing focus international exploration production activities expenditures 2002 included lower additional investments equity affiliates 2001 reflecting absence company’s share expenditures equilon motiva investments sold condition merger 2001 expenditures included additional investments tco dynegy including purchase 15 billion dynegy preferred stock company estimates 2003 capital exploratory expenditures 85 billion 8 percent lower expenditures 2002 included amount 16 billion affiliates’ expenditures 64 billion 75 percent total budgeted exploration production activities 47 billion outside united states worldwide exploration production expenditures target promising exploratory prospects nigeria angola deepwater gulf mexico major development projects kazakhstan venezuela africa worldwide downstream spending estimated 13 billion 11 billion amount refining marketing 200 million transportation projects investments chemicals budgeted 300 million estimates power related businesses 300 million 600 million 2002 remaining 200 million primarily emerging technologies information technology infrastructure fs9 capital exploratory expenditures financial ratios current ratio current assets divided current liabilities generally two items adversely affect chevrontexaco’s current ratio company’s opinion affect liquidity first current assets years included inventories valued lifo basis yearend 2002 lower replacement costs based average acquisition costs year nearly 16 billion second company benefits lower interest rates available shortterm debt continually refinancing commercial paper however company’s proportionately large amount shortterm debt keeps current ratio relatively low levels interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs chevrontexaco’s interest coverage ratio lower 2002 primarily due lower beforetax income partially offset lower interest expense result lower interest rates debt ratio total debt divided total debt plus equity ratio 34 percent december 31 2002 compared 339 percent year earlier financial ratios guarantees offbalancesheet arrangements contractual obligations contingencies direct indirect guarantees amounts exclude indemnifications contingencies associated sales company’s interests equilon motiva december 31 2002 company subsidiaries provided guarantees either directly indirectly 1038 billion notes contractual obligations affiliated companies 806 million third parties discussed major category amounts carried liabilities company’s obligations guarantees issued regard affiliates’ operations 775 million relates borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects approximately 50 percent amounts guaranteed expire within 20032006 period remaining guarantees expiring end 2015 terms guarantees company would required perform affiliate default loan terms generally full amounts disclosed provisions recourse third parties assets held collateral guarantees company provides guarantees 263 million relating obligations connection pricing power purchase agreements certain cogeneration affiliates terms guarantees company may required make payments certain conditions affiliates perform agreements provisions recourse third parties assets held collateral pricing guarantees 437 million issued regard obligations third parties including approximately 100 million construction loans host governments company’s international upstream operations remaining guarantees 337 million provided principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities approximately half total amounts guaranteed expire 2003 remainder expiring 2007 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 200 million guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets guarantees 369 million relate equilon debt leases connection february 2002 disposition interest equilon shell oil company agreed indemnify company claims arising guarantees company recorded liability guarantees approximately 30 percent debt leases expire within 20032007 period guarantees remaining amounts expiring 2024 indemnities company also provided certain indemnities contingent liabilities equilon motiva shell oil com fs10 pany saudi refining inc connection february 2002 sale company’s interests investments indemnities cover contingent general liabilities certain contingent environmental liabilities associated unocal patent litigation company would required perform contingent general liabilities become actual liabilities within 18 months sale could required make maximum future payments 300 million company recorded liabilities contingencies recourse provisions enabling recovery amounts third parties assets held collateral within five years february 2002 sale buyer’s option company also may required purchase certain assets shell oil company net book value determined time company’s purchase indemnities pertaining contingent environmental liabilities relate assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods chevrontexaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 12 2001 claims relating equilon must asserted later february 13 2009 claims relating motiva must asserted later february 13 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities amounts indemnified net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident company holds assets collateral 2002 company made payments indemnities securitization offbalancesheet arrangements company securitizes certain retail trade accounts receivable us downstream business use qualifying special purpose entities spes december 31 2002 approximately 1 billion representing 11 percent chevrontexaco’s total current accounts receivable balance securitized chevrontexaco’s total estimated financial exposure arrangements december 31 2002 approximately 75 million arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experiencing major defaults collection receivables chevrontexaco believes would loss exposure connected thirdparty investments securitization arrangements longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries entered longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate amounts estimated payments required life agreements approximately 9 billion significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate due 2009 future estimated commitments contract 2003 800 million 2004 800 million 2005 900 million 2006 900 million 2007 900 million 2008 2009 18 billion following table summarizes company’s significant contractual obligations contractual obligations 1 includes 4110 billion shortterm debt company expects continually refinance repay 2007 2 includes guarantees 385 million lesop debt 25 million due 2004 360 million due 2007 minority interests preferred shares issued subsidiary companies third parties accounted minority interest mvp production inc subsidiary variable rate cumulative preferred shares 75 million owned one minority holder shares voting redeemable 2003 texaco capital llc wholly owned finance subsidiary issued 65 million deferred preferred shares dividends 59 million equivalent interest rate 717 percent compounded annually paid redemption date february 28 2005 unless earlier redemption occurs financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related volatility crude oil refined products natural gas refinery feedstock prices company uses derivative commodity instruments manage exposure price volatility small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids chevrontexaco also uses derivative commodity instruments trading purposes results activity fs11 material company’s financial position results operations cash flows 2002 company’s positions monitored managed daily basis internal risk control group ensure compliance company’s risk management policy approved company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures contracts traded new york mercantile exchange international petroleum exchange crude oil natural gas swap contracts options derivative products entered principally major financial institutions oil gas companies virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally market quotes independent thirdparty quotes aggregate effect derivative activity hypothetical 15 percent change prices natural gas crude oil petroleum products would material company’s financial position net income cash flows hypothetical loss related commodity contracts estimated calculating cash value contracts difference hypothetical contract delivery prices multiplied contract amounts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value consolidated balance sheet resulting gains losses reflected income aggregate effect foreign currency swaps hypothetical adverse change 10 percent yearend exchange rates weakening us dollar would material company’s financial position results operations cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income 2002 new swaps initiated connection debt issues year yearend 2002 weighted average maturity interest rate swaps approximately 56 years hypothetical 10 percent increase interest rates upon interest rate swaps would cause fair value “receive fixed” swaps decline aggregate effect changes would material company’s financial position results operations cash flows dynegy preferred stock investment company’s 15 billion investment mandatorily redeemable convertible preferred stock dynegy carried estimated fair value 300 million december 31 2002 investment publicly traded estimate fair value required estimate based comparison pricing marketable dynegy bonds added factor estimated liquidity discount methodologies could resulted higher lower fairvalue estimation see also page fs8 information dynegy transactions related parties chevrontexaco enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements united states longterm agreements place dynegy purchase substantially natural gas natural gas liquids produced company united states excluding alaska supply natural gas natural gas liquids feedstocks company’s us refineries chemicals plants 2003 chevrontexaco dynegy agreed terminate natural gas sale purchase agreements end january 2003 internationally longterm purchase agreements place company’s refining affiliate thailand see page fs11 discussion management believes foregoing agreements others negotiated terms consistent would negotiated unrelated party litigation contingencies unocal patent litigation chevron texaco four oil companies refiners filed suit 1995 contesting validity patent ‘393’ patent granted unocal corporation unocal certain reformulated gasoline blends chevrontexaco sells reformulated gasolines california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocal’s patent valid enforceable assessed damages 575 cents per gallon gasoline produced summer 1996 infringed claims patent february 2001 us supreme court concluded would review lower court’s ruling case sent back district court accounting infringing gasoline produced august 1 1996 district court ruled pergallon damages awarded jury limited infringement occurs california additionally us patent trademark office uspto granted two petitions refiners reexamine validity unocal’s ‘393’ patent twice rejected claims ‘393’ patent district court judge requested briefing advised would enter final judgment case uspto completed reexamination ‘393’ patent 2002 uspto also rejected validity another unocal patent ‘126’ patent could affect larger share us gasoline production separately ftc issued administrative complaint alleging unocal’s conduct matter represented unfair method competition may make unocal’s patents unenforceable unocal obtained additional patents could affect larger share us gasoline production chevrontexaco believes additional patents invalid unenforceable andor infringed company’s financial exposure event unfavorable conclusions patent litigation regulatory reviews may include royalties plus interest production gasoline proved infringed patents competitive financial effects company’s refining marketing operations presently indeterminable could material chevrontexaco accruing normal course business future estimated liability potential infringement ‘393’ patent covered 1998 trial court’s ruling 2000 prior merger chevron texaco made payments fs12 unocal totaling approximately 30 million original court ruling including interest fees environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold following table displays annual changes company’s beforetax environmental remediation reserves including superfund sites 2002 company recorded additional provisions estimated remediation costs refined products marketing sites various closed divested facilities united states provisions superfund law environmental protection agency epa designated chevrontexaco potentially responsible party otherwise involved company remediation 420 hazardous waste sites company made provisions payments 2002 prior years 293 sites single site expected result material liability company remaining sites investigations yet stage company able quantify probable liability determine range reasonably possible exposures superfund law provides joint several liability responsible parties future actions epa regulatory agencies require chevrontexaco assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remediation reserves yearend 2002 2001 2000 superfund sites 95 million 62 million 73 million respectively another issue involving company petroleum industry’s use methyl tertiary butyl ether mtbe gasoline additive potential environmental impact seepage groundwater along oil companies company party lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period chevrontexaco worked reduce use mtbe gasoline manufactures united states state california directed mtbe phased manufacturing process end 2003 company intends comply mandate may 2003 company plans market branded gasoline uses ethanol oxygenate instead mtbe southern california complete changeover northern california later year likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties amount future costs may material company’s results operations period recognized company expect costs material adverse effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative petroleum chemicals companies company maintains additional reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives many costs related environmental issues expense provisions recognized unitofproduction basis reserves balance yearend 2002 23 billion included “accumulated depreciation depletion amortization” company’s consolidated balance sheet please refer pages fs16 fs17 information relating company’s 2003 implementation financial accounting standards board fasb standard 143 “accounting asset retirement obligations” company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made see “environmental matters” page fs14 additional information related environmental matters income taxes company estimates income tax expense liabilities annually liabilities generally finalized individual taxing authorities several years end annual period income taxes estimated us federal income tax liabilities settled 1996 chevrontexaco formerly chevron 1993 chevrontexaco global energy inc formerly caltex 1991 texaco california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range estimates exist possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability approximately 200 million time possible maximum net amount could owed chevrontexaco fs13 estimated 50 million timing settlement exact amount within range estimates uncertain global operations areas company affiliates major operations include united states america canada australia united kingdom norway denmark france partitioned neutral zone kuwait saudi arabia republic congo democratic republic congo angola nigeria chad equatorial guinea indonesia papua new guinea china thailand venezuela argentina brazil colombia trinidad tobago south korea philippines singapore south africa company’s tco affiliate operates kazakhstan company’s cpchem affiliate manufactures markets wide range petrochemicals plastics worldwide basis manufacturing facilities existence construction united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s dynegy affiliate operations united states canada united kingdom european countries company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states instance december 2002 caltex oil sapty limited “caltex oil sa” announced signing shareholders agreement south african consortium black economic empowerment partners agreement intended ultimately provide consortium 25 percent equity interest aspects caltex’s operations south africa uncertain whether additional actions taken host governments countries increase public ownership company’s partially wholly owned businesses certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries suspended wells company also suspends costs exploratory wells pending final determination commercial potential related oil gas fields ultimate disposition well costs dependent results future drilling activity andor development decisions company decides continue development costs wells expensed december 31 2002 company 450 million suspended exploratory wells included properties plant equipment decrease 238 million 2001 332 million 2000 contingencies chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant may take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevrontexaco sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative andor remedial work meet current standards using definitions guidelines established american petroleum institute chevrontexaco estimated worldwide environmental spending 2002 1324 billion consolidated companies included expenditures 399 million environmental capital expenditures 925 million costs associated control abatement hazardous substances pollutants ongoing operations 2003 total worldwide environmental capital expenditures estimated 458 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites application critical accounting policies may 2002 sec issued proposed rule “disclosure management’s discussion analysis application critical accounting policies” although sec issued final rule midmarch 2003 following discussion prepared basis guidelines sec rule proposal adopted proposed rule would require disclosures connected “estimates company makes applying accounting policies” however discussion would limited “critical accounting estimates” management believes meet two criteria proposal “first accounting estimate must require company make assumptions matters highly uncertain time accounting estimate made second different estimates company reasonably could used accounting estimate current period changes accounting estimate reasonably likely occur period must material impact presentation company’s financial condition changes financial condition results operations” beside estimates meet “critical” estimate criteria company makes many accounting estimates preparing financial statements related disclosures estimates whether deemed critical affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates based experience information available prior issuance financial statements materially different results occur circumstances fs14 change additional information becomes known including estimates deemed “critical” sec rule proposal example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation oil gas reserves sec rules require “ geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” pages fs51 fs52 changes estimates three years ending december 31 2002 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs54 estimates provedreserve values yearend 20002002 based yearend prices time note 1 consolidated financial statements includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred upcoming discussion critical accounting policy “impairment property plant equipment investments affiliates” includes reference conditions downward revisions proved reserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs25 development selection accounting estimates including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates made company follows pension postretirement benefit plans determination pension plan expense requirements funding company’s major pension plans based number actuarial assumptions two critical assumptions rate return pension plan assets discount rate applied pension plan obligations postretirement employee benefit opeb plans provide certain health care life insurance qualifying retired employees funded critical assumptions determining opeb expense discount rate applied benefit obligations assumed health care costtrend rates used calculation benefit obligations note 19 consolidated financial statements page fs39 includes information three years ending december 31 2002 components pension opeb expense underlying discount rate assumptions well funded status company’s pension plans end 2002 2001 determine estimate longterm rate return pension assets company employs process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice example december 31 2002 estimated longterm rate return us pension plan assets accounted majority company’s pension plan assets 78 percent compared rates 88 percent 100 percent end 2001 2000 respectively yearend marketrelated value us pension plan assets used determination pension expense based market values preceding three months opposed maximum allowable period five years pension accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility yet still contemporaneous end year discount rate used determination pension benefit obligations pension expense based highquality fixed income investment interest rates december 31 2002 company calculated us pension obligations using 68 percent discount rate discount rates used ends 2001 2000 73 percent 75 percent respectively increase expected return pension plan assets discount rate would reduce pension plan expense vice versa total pension expense 2002 457 million indication interestrate sensitivity determination pension expense 1 percent increase expected return assets company’s main us pension plan accounted significant majority companywide pension obligation would reduced total pension plan expense 2002 approximately 30 million 1 percent increase discount rate plan would reduced total benefit plan expense approximately 130 million actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets based expected changes pension plan asset values pension obligations 2003 company believe significant funding pension plans required year us plans determination made accordance minimum funding standard employee retirement income security act erisa pension expense included consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments depending upon funding status different plans either longterm prepaid asset longterm liability recorded plans overfunding underfunding respectively unfunded accumulated benefit obligation excess recorded liabilities recorded “other comprehensive income” see note 19 consolidated financial statements page fs40 pensionrelated balance sheet effects end 2002 2001 company’s opeb plans expense 2002 199 million also recorded “operating expenses” “selling general administrative expenses” business segments discount rate applied company’s opeb obligations december 31 2002 675 percent discount rate used us pension obligations assumed health care costtrend rates used calculate opeb obligations december 31 2002 start 12 percent cost increase previous year 2002 gradually dropping five years longterm ultimate rateincrease assumption 45 percent 2007 thereafter 12 percent rate assumption 2002 provided external consultants 45 percent rateincrease assumption duration reach rate company estimate indication discountrate sensitivity determination opeb expense 2002 impact 1 percent increase discount rate company’s main us opeb plan accounted significant majority companywide opeb obligation would significant sensitivity opeb expense discount rate changes may vary fs15 future depending combination factors enter determination opeb expense one period impairment property plant equipment investments affiliates company assesses property plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices oil gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions amount income statement classification major impairments ppe three years ending december 31 2002 included commentary business segments elsewhere discussion well note 4 consolidated financial statements page fs28 estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value 2002 company recorded impairments investments dynegy caltex australia impairment dynegy discussed mda explanation 2002 results “all other” page fs7 “information related investment dynegy inc” page fs8 notes 4 13 consolidated financial statements impairment caltex australia discussed explanation 2002 results international downstream page fs6 included note 13 consolidated financial statements impairment charges taken 2002 dynegy caltex australia common stock investments based fair values determined publicly quoted prices impairment charges recorded company’s investment dynegy preferred stock based upon company’s estimate instrument’s fair value time since chevrontexaco sole preferred stock shareholder instrument publicly traded making estimate reference made among things pricing marketable dynegy bonds added factor estimated liquidity discount see also page fs12 information relating company’s investment dynegy preferred stock different effects company earnings would resulted making different assumptions related investments dynegy caltex australia qualitative factors considered making assessments whether declines fair value “other temporary” subject sensitivity analysis different assumptions might resulted impairments recorded greater lesser amount impairment charge andor difference timing impairment charges contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income refer business segment discussions elsewhere discussion note 4 consolidated financial statements page fs28 effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2002 estimate sensitivity earnings periods assumptions used recording liabilities practical number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards june 2001 fasb issued statement 143 “accounting asset retirement obligations” fas 143 new standard adopted effective january 1 2003 applies legal obligations associated retirement tangible longlived assets adoption fas 143 primarily affects company’s accounting oil gas producing assets fas 143 differs several significant respects current accounting fas 19 “financial accounting reporting oil gas producing companies” adoption fas 143 affects future accounting reporting assets liabilities expenses related obligations first quarter 2003 company report aftertax loss 200 million 250 million cumulative effect change accounting principle including company’s share effect adoption equity affiliates effect adoption also included increase total assets total liabilities 26 billion 28 billion respectively fs16 cumulativeeffect change effect new accounting standard 2003 net income expected materially different result would fas 19 accounting upon adoption legal obligations retire downstream chemical longlived assets generally recognized indeterminate settlement dates asset retirement therefore insufficient information exists estimate potential settlement dates apply netpresentvalue techniques estimate fair value retirement obligation july 2002 fasb issued statement 146 “accounting costs associated exit disposal activities” fas 146 standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operations plant closing exit disposal activity statement replaces eitf emerging issues task force fasb issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” fas 146 applied prospectively exit disposal activities initiated december 31 2002 november 2002 fasb issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 disclosure provisions fin 45 effective fiscal years ending december 15 2002 included note 21 “other contingencies commitments” whereas recognition measurement requirements applied prospective basis guarantees issued modified december 31 2002 requirements relate future events effect cannot determined december 2002 fasb issued statement 148 “accounting stockbased compensation transition disclosure” fas 148 amends fasb statement 123 “accounting stockbased compensation” fas 148 permits two additional transition methods entities adopt fairvaluebased method accounting stockbased employee compensation amends disclosure requirements annual interim financial statements chevrontexaco continue apply accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations accounting stock options amended disclosure requirements fas 148 incorporated note 1 consolidated financial statements january 2003 fasb issued interpretation 46 “consolidation variable interest entities” fin 46 fin 46 amended arb 51 “consolidated financial statements” established standards determining circumstances variable interest entity vie consolidated primary beneficiary fin 46 also requires disclosures vies company required consolidate significant variable interest consolidation requirements fin 46 apply immediately vies created january 31 2003 consolidation requirements apply older entities first fiscal year interim period beginning june 15 2003 certain disclosure requirements apply financial statements issued january 31 2003 regardless vie established company expect adoption fin 46 significant impact results operations financial position liquidity fs17 report independent accountants stockholders board directors chevrontexaco corporation opinion based audits report auditors ceased operations consolidated financial statements listed index appearing item 15a1 page 29 present fairly material respects financial position chevrontexaco corporation subsidiaries december 31 2002 2001 results operations cash flows three years period ended december 31 2002 conformity accounting principles generally accepted united states america addition based audits report auditors ceased operations financial statement schedule listed index appearing item 15a2 page 29 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits consolidated financial statements give retroactive effect merger texaco inc october 9 2001 transaction accounted pooling interests described note 2 consolidated financial statements audit financial statements financial statement schedule texaco inc statements reflect total revenues 51130 million year ended december 31 2000 statements schedule audited auditors ceased operations whose report thereon furnished us opinion expressed herein insofar relates amounts included texaco inc based solely report auditors conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits report auditors provide reasonable basis opinion pricewaterhousecoopers llp san francisco california march 7 2003 following report copy report previously issued arthur andersen llp reissued arthur andersen llp report independent public accountants shareholders texaco inc audited consolidated balance sheet texaco inc delaware corporation subsidiary companies december 31 2000 related consolidated statements income stockholders’ equity comprehensive income cash flows two years period ended december 31 2000 financial statements presented separately herein responsibility company’s management responsibility express opinion financial statements based audits conducted audits accordance auditing standards generally accepted united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements audit also includes assessing accounting principles used significant estimates made management well evaluating overall financial statement presentation believe audits provide reasonable basis opinion financial statements referred presented separately herein present fairly material respects financial position texaco inc subsidiary companies december 31 2000 results operations cash flows two years period ended december 31 2000 conformity accounting principles generally accepted united states audit made purpose forming opinion basic financial statements taken whole schedule listed item 14 texaco inc’s 2000 form 10k presented separately herein responsibility company’s management presented purposes complying securities exchange commission’s rules part basic financial statements schedule subjected auditing procedures applied audit basic financial statements opinion fairly states material respects financial data required set forth therein relation basic financial statements taken whole arthur andersen llp new york new york february 22 2001 fs18 consolidated statement income see accompanying notes consolidated financial statements report management stockholders chevrontexaco corporation management chevrontexaco responsible preparing accompanying financial statements ensuring integrity objectivity statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgments company’s statements audited pricewaterhousecoopers llp independent accountants selected audit committee approved stockholders management made available pricewaterhousecoopers llp company’s financial records related data well minutes stockholders’ directors’ meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance management’s authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent accountants discuss adequacy company’s internal controls financial statements nature extent results audit effort internal auditors independent accountants free direct access audit committee without presence management david j o’reilly david j o’reilly chairman board chief executive officer john watson john watson vice president chief financial officer stephen j crowe stephen j crowe vice president comptroller march 7 2003 fs19 consolidated statement comprehensive income see accompanying notes consolidated financial statements fs20 consolidated balance sheet see accompanying notes consolidated financial statements fs21 consolidated statement cash flows see accompanying notes consolidated financial statements fs22 consolidated statement stockholders’ equity see accompanying notes consolidated financial statements fs23 consolidated statement stockholders’ equity continued see accompanying notes consolidated financial statements fs24 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies basis presentation merger chevron texaco october 9 2001 texaco inc texaco became wholly owned subsidiary chevron corporation chevron pursuant merger transaction chevron changed name chevrontexaco corporation chevrontexaco combination accounted pooling interests consolidated financial statements give retroactive effect merger periods presented chevron texaco always combined certain reclassifications made conform separate presentations chevron texaco reclassifications impact amount net income stockholders’ equity consolidated financial statements include accounts majorityowned controlled subsidiaries elimination significant intercompany accounts transactions included consolidation accounts caltex group companies caltex joint venture owned 50 percent chevron texaco prior merger accounted equity method companies general chevrontexaco manages investments provides administrative financial management support us foreign subsidiaries affiliates engage fully integrated petroleum operations chemicals operations coal mining activities addition chevrontexaco holds investments power generation gasification businesses collectively companies operate approximately 180 countries petroleum operations consist exploring developing producing crude oil natural gas refining crude oil finished petroleum products marketing crude oil natural gas many products derived petroleum transporting crude oil natural gas petroleum products pipelines marine vessels motor equipment rail car chemicals operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lube oil additives preparing consolidated financial statements company follows accounting principles generally accepted united states america requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income deferred income taxes provided gains losses investments assessed possible impairment indications fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments common stock equity investees changed subsequent recoveries fair value subsequent recoveries carrying value investments reported “other comprehensive income” goodwill differences company’s carrying value equity investment underlying equity net assets affiliate amortized income generally estimated economic life underlying net assets differences attributable goodwill subject assessment impairment derivatives majority company’s activity commodity derivative instruments intended manage price risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company elected apply hedge accounting changes fair value contracts reflected current income company’s trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixed rate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income shortterm investments shortterm investments classified available sale highly liquid debt equity securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” shortterm investments markedtomarket unrealized gains losses included “other comprehensive income” fs25 note 1 summary significant accounting policies continued inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used oil gas exploration production activities costs development wells related plant equipment proved mineral interests oil gas properties capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending one following 1 decisions additional major capital expenditures 2 results additional exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed determination whether proved reserves found cannot made within one year following completion drilling exploratory wells costs expensed longlived assets including proved oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset impaired assets written estimated fair values generally discounted future net beforetax cash flows proved oil gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession field basis appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense depreciation depletion including provisions future abandonment restoration costs capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated assessments timing magnitude accruals generally based company’s commitment formal plan action approved remediation plan sale disposal asset company’s us canadian marketing facilities accrual based probability future remediation commitment required oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end property’s useful life see also note 18 related financial accounting standards board statement 143 “accounting asset retirement obligations” became effective chevrontexaco january 1 2003 superfund sites company records liability share costs named potentially responsible party prp assessment cleanup plan developed liability includes company’s portion costs also company’s portion amounts prps probable able pay share cleanup obligation company records gross amount liability based best estimate future costs using currently available technology applying current regulations well company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevrontexaco interest producers generally recognized basis company’s net working interest entitlement method stock compensation december 31 2002 company stockbased employee compensation plans described fully note 20 company accounts plans recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations following table illustrates effect net income earnings per share fs26 note 1 summary significant accounting policies continued company applied fair valuerecognition provisions financial accounting standards board fasb statement 123 “accounting stockbased compensation” stockbased employee compensation note 2 texaco merger transaction extraordinary item following table presents summarized financial data combined company periods prior merger 1 includes certain reclassification adjustments conform historical chevron presentation 2 consolidation former equity operations intercompany eliminations 3 loss associated sales company’s interests equilon motiva time merger share texaco common stock converted taxfree basis right receive 077 shares chevrontexaco common stock approximately 425 million additional shares common stock issued representing 40 percent outstanding chevrontexaco common stock merger condition approving merger us federal trade commission ftc required divestment certain texaco assets texaco’s investments us refining marketing transportation affiliates equilon enterprises llc equilon motiva enterprises llc motiva well interests us natural gas processing transportation facilities general aviation fuel marketing time merger texaco placed interests equilon motiva trust required ftc company longer exercised significant influence investments associated accounting method changed equity cost basis net income 2001 included loss 643 net tax benefit 144 061 per common share diluted related disposition assets required condition ftc approval merger assets made duplicative merger aftertax loss dispositions reported extraordinary item accordance poolingofinterests accounting requirements included total aftertax loss 564 connected sale interests equilon motiva proceeds sale closed february 2002 approximately 2200 assets sold order ftc assets disposed made duplicative merger total net book value yearend 2001 2181 amount included “current assets” consolidated balance sheet december 31 2001 “assets held sale merger related” net income 2001 associated assets sold result merger approximately 375 corresponding amount 2002 significant note 3 employee termination benefits restructuring costs connection merger company incurred significant incremental expenses included employee severance payments incremental pension medical plan benefits associated workforce reductions legal accounting sec filing investment banker fees employee office relocations elimination redundant facilities operations 2002 beforetax mergerrelated expenses 576 386 tax 2001 expenses 1563 1136 tax included amounts accruals 891 60 2001 2002 respectively severancerelated benefits approximately 4500 employees mergerrelated expenses benefit future operations activity mergerrelated accrual balance summarized table 4500 employees approximately 450 remained payroll december 31 2002 130 remaining employees expected terminate employment first quarter 2003 yearend 2002 accrual balance expected extinguished approximately two years reflecting severance payment deferral option exercised certain employees company expect incur significant amounts mergerrelated expenses 2003 fs27 note 4 special items financial information net income period presented includes amounts categorized company “special items” management separately identifies assist identification explanation trend results listed following table categories items net increase decrease net income related tax effects 2002 company recorded writedowns 1626 investment dynegy common preferred stock 136 investment publicly traded caltex australia affiliate respective estimated fair values writedowns required declines fair values investments carrying values deemed temporary refer note 13 additional information company’s investment dynegy caltex australia also 2002 impairments 183 recorded various us exploration production properties 100 international projects reflecting lower expected recovery proved oil reserves impairments 2001 included 1022 midway sunset field california result writedown proved oil reserve quantities upon determination lowerthanprojected oil recovery field’s steam injection process 247 impairment ll652 field venezuela also recorded 2001 slowerthanexpected reservoir repressurization resulted reduction projected volumes oil recoverable company’s remaining contract period operation asset impairments included “asset writeoffs revaluations” assets held use aggregate effects income statement categories special items reflected following table including chevrontexaco’s proportionate share special items related equity affiliates financial information follows includes 66 12 66 2002 2001 2000 respectively company’s share equity affiliates’ foreign currency losses gains excess market value carrying value inventories lifo method used 1578 1580 2339 december 31 2002 2001 2000 respectively market value generally based average acquisition costs year fs28 note 5 information relating consolidated statement cash flows “net decrease operating working capital” composed following major components “capital expenditures” reconciliation amount capital exploratory expenditures excluding equity affiliates presented management’s discussion analysis financial condition results operations mda detailed following table 1 net noncash items 195 2002 63 2001 2 includes 1500 investment dynegy preferred stock 3 represents deferred payment related 1993 acquisition interest tengizchevroil joint venture 2000 chevron contributed 2800 net noncash assets chevron phillips chemical company llc cpchem investment accounted equity method note 6 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevrontexaco corporation cusa subsidiaries manage operate chevrontexaco’s us businesses assets related exploration production crude oil natural gas natural gas liquids also associated refining marketing supply distribution products derived petroleum natural gas liquids excluding pipeline operations chevrontexaco cusa also holds divisions overseeing operating global businesses aviation fuel lubricants shipping trading divisions providing administrative technical services affiliated companies cusa holds chevrontexaco’s investment cpchem joint venture dynegy accounted using equity method 2002 chevrontexaco implemented legal reorganization certain chevrontexaco subsidiaries transferred assets cusa chevrontexaco companies merged cusa summarized financial information cusa consolidated subsidiaries presented table gives retroactive effect reorganization manner similar pooling interests periods presented companies always combined reorganization occurred january 1 2000 however financial information included may reflect financial position operating results future historical results periods presented reorganization actually occurred january 1 2000 cusa’s net loss 1897 2002 included net charges 2555 asset writedowns dispositions 2306 related dynegy note 7 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevrontexaco corporation ctc principal operator chevrontexaco’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevrontexaco companies chevrontexaco corporation guaranteed subsidiary’s obligations con fs29 note 7 summarized financial data chevron transport corporation ltd continued nection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented follows 2002 ctc’s paidin capital increased 6 additional capital contributions settlements restrictions ctc’s ability pay dividends make loans advances december 31 2002 note 8 stockholders’ equity retained earnings december 31 2002 2001 included approximately 1559 2015 respectively company’s share undistributed earnings equity affiliates upon merger chevron texaco authorized common stock chevrontexaco increased 2 billion shares 075 par value 4 billion shares 075 par value terms merger agreement approximately 425 million shares chevrontexaco common stock issued exchange outstanding shares texaco common stock based upon exchange ratio 077 chevrontexaco share texaco share texaco’s common stock held treasury canceled effective time merger 1998 connection renewal chevron’s stockholder rights plan chevron declared dividend distribution outstanding share common stock one right purchase participating preferred stock since distribution 1998 newly issued shares corporation’s common stock accompanied preferred stock purchase right including shares issued connection merger chevron texaco following merger chevron stockholder rights plan continued stockholder rights plan chevrontexaco rights issued plan become exercisable unless redeemed earlier chevrontexaco person group acquires obtains right acquire 10 percent outstanding shares common stock commences tender exchange offer would result person group acquiring 10 percent outstanding shares common stock either event occurring without prior consent chevrontexaco series participating preferred stock holder right entitled receive purchase price payable upon exercise chevrontexaco right subject adjustment person group acquired 10 percent outstanding shares common stock without prior consent chevrontexaco would entitled purchase november 2002 stockholder rights agreement amended rights expire november 2003 five years earlier initial expiration date november 2008 rights may redeemed company 1 cent per right prior expiration date rights voting dividend rights become exercisable dilutive effect earnings per share company five million shares company’s preferred stock designated series participating preferred stock reserved issuance upon exercise rights event 2002 made rights exercisable june 2001 1200 shares texaco cumulative variable rate preferred stock called market auction preferred shares maps outstanding aggregate value 300 maps redeemed june 2001 liquidation preference 250000 per share plus premium accrued unpaid dividends december 31 2002 30 million shares chevrontexaco’s authorized unissued common stock reserved issuance chevrontexaco corporation longterm incentive plan ltip approved stockholders 1990 date plan’s common stock requirements met company’s treasury stock issuances reserved shares note 9 financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related price volatility crude oil refined products natural gas refinery feedstock company uses derivative commodity instruments manage exposure small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixed price contracts sell natural gas natural gas liquids company also uses derivative commodity instruments limited trading purposes company maintains policy requiring international swaps derivatives association agreement govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transaction bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty “net” marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk company’s policy use netting agreements certain counterparties conducts significant transactions fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows fs30 note 9 financial derivative instruments continued foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income 2002 new swaps initiated yearend 2002 interest rate swaps outstanding related fixedrate debt weighted average maturity approximately 56 years fair values interest rate swaps reported consolidated balance sheet “accounts notes receivables” “accounts payable” gains losses reported directly income part “interest debt expense” activities reported “operating activities” consolidated statement cash flows concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient letters credit principal security obtained support lines credit fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 7296 6599 estimated fair values 7971 7097 december 31 2002 2001 respectively interest rate swaps notional principal amounts 665 930 estimated fair values 70 2 december 31 2002 2001 respectively company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 2506 2449 december 31 2002 2001 respectively balances 1682 1446 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately 39 years company’s 1500 investment redeemable convertible preferred stock dynegy affiliate estimated fair value 300 december 31 2002 note 10 operating segments geographic data chevrontexaco separately manages exploration production refining marketing transportation chemicals businesses “all other” activities include corporate administrative costs worldwide cash management debt financing activities company’s investment dynegy coal mining operations power gasification operations technology investments insurance operations real estate activities expenses net losses associated merger company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs merger effects remain corporate level aftertax segment income loss presented following table fs31 note 10 operating segments geographic data continued segment assets segment assets include intercompany investments intercompany receivables december 31 2001 “all other” also included 2181 mergerrelated assets held sale segment assets yearend 2002 2001 follow segment sales operating revenues operating segment sales operating revenues including internal transfers years 2002 2001 2000 presented following table sales transfer products segments prices approximate market revenues exploration production segment derived primarily production crude oil natural gas revenues refining marketing transportation segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products revenues chemicals segment derived manufacture sale additives lubricants fuel prior july 2000 formation cpchem chemicals segment revenues derived manufacture sale petrochemicals plastic resins lube oil fuel additives subsequent formation joint venture revenues manufacture sale lube oil fuel additives included revenues “all other” activities include coal mining operations power gasification operations technology investments insurance operations real estate activities united states country chevrontexaco generates significant revenues united kingdom amounted 10816 10350 12101 2002 2001 2000 respectively fs32 note 10 operating segments geographic data continued segment income taxes segment income tax expenses years 2002 2001 2000 follows segment information additional information segmentation major equity affiliates contained note 13 information related properties plant equipment segment contained note 14 note 11 litigation unocal chevron texaco four oil companies refiners filed suit 1995 contesting validity patent ‘393’ patent granted unocal corporation unocal certain reformulated gasoline blends chevrontexaco sells reformulated gasolines california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocal’s patent valid enforceable assessed damages 575 cents per gallon gasoline produced summer 1996 infringed claims patent february 2001 us supreme court concluded would review lower court’s ruling case sent back district court accounting infringing gasoline produced august 1 1996 district court ruled pergallon damages awarded jury limited infringement occurs california additionally us patent trademark office uspto granted two petitions refiners reexamine validity unocal’s ‘393’ patent twice rejected claims ‘393’ patent district court judge requested briefing advised would enter final judgment case uspto also completed reexamination ‘393’ patent 2002 uspto also rejected validity another unocal patent ‘126’ patent could affect larger share us gasoline production separately ftc issued administrative complaint alleging unocal’s conduct matter represented unfair method competition may make unocal’s patents unenforceable unocal obtained additional patents could affect larger share us gasoline production chevrontexaco believes additional patents invalid unenforceable andor infringed company’s financial exposure event unfavorable conclusions patent litigation regulatory reviews may include royalties plus interest production gasoline proved infringed patents competitive financial effects company’s refining marketing operations presently indeterminable could material chevrontexaco accruing normal course business future estimated liability potential infringement ‘393’ patent covered 1998 trial court’s ruling 2000 prior merger chevron texaco made payments unocal totaling approximately 30 million original court ruling including interest fees mtbe another issue involving company petroleum industry’s use methyl tertiary butyl ether mtbe gasoline additive potential environmental impact seepage groundwater along oil companies company party lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period chevrontexaco worked reduce use mtbe gasoline manufactures united states state california directed mtbe phased manufacturing process end 2003 company intends comply mandate may 2003 company plans market branded gasoline uses ethanol oxygenate instead mtbe southern california complete changeover northern california later year note 12 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows fs33 note 12 lease commitments continued rental expenses incurred operating leases 2002 2001 2000 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2002 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 13 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost follows placed trust time merger accounting changed equity method cost basis interests classified “assets held sale merger related” december 31 2001 includes 96 star petroleum refining company ltd descriptions major affiliates 2002 follows tengizchevroil tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period chevron’s ownership 45 percent 1999 2000 january 2001 company purchased additional 5 percent interest upon formation joint venture company incurred obligation 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tco’s production capacity part january 2001 transaction company paid 210 420 obligation 420 also included carrying value original investment company believed beyond reasonable doubt full payment would made fs34 note 13 investments advances continued equilon enterprises llc motiva enterprises llc february 2002 company equity interests equilon motiva joint ventures engaged us refining marketing activities mandate ftc condition merger company’s ownership interests placed trust october 9 2001 trust completed dispositions company’s investments equilon motiva february 2002 see note 2 additional information equilon motiva lgcaltex oil corporation chevrontexaco owns 50 percent lgcaltex joint venture formed 1967 lg group caltex engage importing refining marketing petroleum products south korea star petroleum refining company ltd chevrontexaco 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery ta phut thailand petroleum authority thailand owns remaining 36 percent sprc caltex australia ltd chevrontexaco 50 percent equity ownership interest caltex australia limited cal remaining 50 percent cal publicly owned 2002 company wrote investment cal 136 estimated fair value september 30 2002 december 31 2002 fair value chevrontexaco’s share cal common stock 163 aggregate carrying value company’s investment cal approximately 100 lower amount underlying equity cal net assets chevron phillips chemical company llc chevrontexaco owns 50 percent cpchem formed july 2000 chevron merged petrochemicals businesses phillips petroleum company cpchem limited liability company chevrontexaco records provision income taxes related tax liability applicable share venture’s income separately consolidated financial statements december 31 2002 company’s carrying value investment cpchem approximately 40 lower amount underlying equity cpchem’s net assets dynegy inc chevrontexaco’s dynegy affiliate owns operating divisions engaged power generation natural gas liquids regulated energy delivery chevrontexaco owns approximately 26 percent dynegy’s common stock also holds 1500 aggregate principal amount dynegy preferred stock 2002 company wrote investments dynegy common preferred stock estimated fair market values market value chevrontexaco’s share dynegy common stock december 31 2002 114 based equivalent closing market prices estimated fair value preferred stock 300 december 31 2002 company’s carrying value commonstock investment dynegy approximately 500 lower amount underlying equity dynegy’s net assets available common shareholders “sales operating revenues” consolidated statement income include 6218 13868 15741 major affiliated companies 2002 2001 2000 respectively “purchased crude oil products” include 1720 3859 4824 major affiliated companies 2002 2001 2000 respectively “accounts notes receivable” consolidated balance sheet include 615 481 due affiliated companies december 31 2002 2001 respectively “accounts payable” include 161 168 due major affiliated companies december 31 2002 2001 respectively 2001 amounts exclude balances equilon motiva following table provides summarized financial information 100 percent basis equilon motiva equity affiliates well chevrontexaco’s total share accounted equity method premerger cost basis postmerger differs 630 10663 shown preceding table “investments advances total equity method” relates primarily differences dynegy inc caltex australia ltd described fs35 note 14 properties plant equipment 1 fs36 note 15 taxes 2002 beforetax loss including related corporate charges us operations 2140 compared beforetax income 1778 2001 5823 2000 international operations beforetax income 6296 6513 8226 2002 2001 2000 respectively us federal income tax expense reduced 208 202 165 2002 2001 2000 respectively business tax credits table include current us tax benefit 2 us deferred tax benefit 142 associated extraordinary item 2001 company’s effective income tax rate varied us statutory federal income tax rate following increase 2002 effective tax rate due number factors primary reason us beforetax income generally subject lower tax rate significantly smaller percentage overall beforetax income 2002 compared 2001 prioryear tax adjustments arose revisions deferred tax valuation allowances tax related accruals impairment investments dynegy caltex australia capital losses offsetting capital gains available company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences expected realized december 31 2002 2001 deferred taxes classified consolidated balance sheet follows company’s policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 10108 december 31 2002 substantially amount represents earnings reinvested part company’s ongoing business practicable estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding fs37 note 15 taxes continued taxes subject certain limitations available use tax credits us tax liability taxes income follows note 16 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 9 information concerning company’s debtrelated derivative activities december 31 2002 company 4110 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate reserve adjusted domestic certificate deposit rate bank prime rate amounts outstanding credit agreements 2002 yearend december 31 2002 2001 company classified 4110 3200 respectively shortterm debt longterm settlement obligations expected require use working capital 2003 company intent ability refinance debt longterm basis note 17 longterm debt chevrontexaco three “shelf” registrations file securities exchange commission together would permit issuance 2050 debt securities pursuant rule 415 securities act 1933 company’s longterm debt outstanding yearend 2002 2001 follows consolidated longterm debt maturing december 31 2002 follows 2003 740 2004 818 2005 550 2006 224 2007 2192 2007 2772 february 2003 company redeemed 200 texaco capital inc bonds originally due 2033 also february company issued 750 3375 percent bonds due february 2008 shelf registration proceeds issuance used pay commercial paper borrowings fs38 note 18 new accounting standards june 2001 fasb issued statement 143 “accounting asset retirement obligations” fas 143 new standard adopted effective january 1 2003 applies legal obligations associated retirement tangible longlived assets adoption fas 143 primarily affects company’s accounting oil gas producing assets fas 143 differs several significant respects current accounting fas 19 “financial accounting reporting oil gas producing companies” adoption fas 143 affects future accounting reporting assets liabilities expenses related obligations first quarter 2003 company report aftertax loss 200 250 cumulative effect change accounting principle including company’s share effect adoption equity affiliates effect adoption also included increase total assets total liabilities 26 billion 28 billion respectively cumulativeeffect change effect new accounting standard 2003 net income expected materially different result would fas 19 accounting upon adoption legal obligations retire downstream chemical longlived assets generally recognized indeterminate settlement dates asset retirement therefore insufficient information exists estimate potential settlement dates apply netpresentvalue techniques estimate fair value retirement obligation july fasb issued statement 146 “accounting costs associated exit disposal activities” fas 146 standard requires companies recognize costs associated exit disposal activities incurred rather date commitment exit disposal plan examples costs covered standard include lease termination costs certain employee severance costs associated restructuring discontinued operations plant closing exit disposal activity statement replaces eitf emerging issues task force fasb issue 943 “liability recognition certain employee termination benefits costs exit activity including certain costs incurred restructuring” fas 146 applied prospectively exit disposal activities initiated december 31 2002 november fasb issued interpretation 45 “guarantor’s accounting disclosure requirements guarantees including indirect guarantees indebtedness others” fin 45 disclosure provisions fin 45 effective fiscal years ending december 15 2002 included note 21 recognition measurement requirements applied prospective basis guarantees issued modified december 31 2002 requirements relate future events effect cannot determined december fasb issued statement 148 “accounting stockbased compensation transition disclosure” fas 148 amends fasb statement 123 “accounting stockbased compensation” fas 148 permits two additional transition methods entities adopt fairvaluebased method accounting stockbased employee compensation amends disclosure requirements annual interim financial statements chevrontexaco continue apply accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations accounting stock options amended disclosure requirements fas 148 incorporated note 1 consolidated financial statements january 2003 fasb issued interpretation 46 “consolidation variable interest entities” fin 46 fin 46 amended arb 51 “consolidated financial statements” established standards determining circumstances variable interest entity vie consolidated primary beneficiary fin 46 also requires disclosures vies company required consolidate significant variable interest consolidation requirements fin 46 apply immediately vies created january 31 2003 consolidation requirements apply older entities first fiscal year interim period beginning june 15 2003 certain disclosure requirements apply financial statements issued january 31 2003 regardless vie established company expect adoption fin 46 significant impact results operations financial position liquidity note 19 employee benefit plans pension plans postretirement benefits company defined benefit pension plans many employees provides certain health care life insurance plans active qualifying retired employees company typically funds defined benefit plans legal funding required united states includes qualified plans subject employee retirement income security act erisa minimum funding standard company fund domestic nonqualified plans international plans subject legal funding requirements aggregated funded status funded unfunded pension plans depicted following table company’s annual contribution medical dental benefits limited lesser actual medical dental claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience nonfunded pension postretirement benefits paid directly incurred accordingly payments reflected changes plan assets following table fs39 note 19 employee benefit plans continued status company’s pension plans postretirement benefit plans 2002 2001 follows fs40 note 19 employee benefit plans continued components net periodic benefit cost 2002 2001 2000 projected benefit obligation accumulated benefit obligation fair value plan assets pension plans accumulated benefit obligations excess plan assets 5761 5327 3283 respectively december 31 2002 2496 2187 1269 respectively december 31 2001 postretirement benefit measurement purposes one set health care costtrend rates used preage 65 65andover retirees starting 2002 approximately 12 percent cost increase previous year trend rates gradually drop 45 percent 2007 beyond onepercentagepoint change assumed health care costtrend rates would following effects employee savings investment plan eligible employees chevrontexaco certain subsidiaries participate chevrontexaco employee savings investment plan esip 2002 employees thrift plan texaco inc employees savings plan chevrontexaco global energy inc formerly caltex corporation stock plan chevrontexaco global energy inc employees thrift plan fuel marine marketing llc merged chevrontexaco esip charges expense plans 161 157 63 2002 2001 2000 respectively employee stock ownership plans esop within chevrontexaco employee savings investment plan company established employee stock ownership plan december 1989 chevron established leveraged employee stock ownership plan lesop constituent part esop lesop provides partial prefunding company’s future commitments esip result annual income tax savings company 1988 texaco established leveraged employee stock ownership plan component employees thrift plan texaco inc thrift plan lesop loan satisfied december 2000 2002 employees thrift plan texaco inc subsumed chevrontexaco esip permitted american institute certified public accountants aicpa statement position 936 “employers’ accounting employee stock ownership plans” company elected continue practices based statement position 763 “accounting practices certain employee stock ownership plans” subsequent consensus emerging issues task force financial accounting standards board debt lesops recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received lesops interest incurred lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations expense recorded lesops 98 75 26 2002 2001 2000 respectively including 32 43 48 interest expense related lesop debt dividends paid lesop shares held used service lesop debt dividends used 49 86 77 2002 2001 2000 respectively company made lesop contributions 102 75 1 2002 2001 2000 respectively satisfy lesop debt service excess dividends received lesop shares pledged collateral debt shares released suspense account allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service charge credit compensation expense 66 32 22 2002 2001 2000 respectively lesop shares december 31 2002 2001 follows benefit plan trust texaco established benefit plan trust funding obligations benefit plans yearend 2002 trust contained 71 million shares chevrontexaco treasury fs41 note 19 employee benefit plans continued stock company intends continue pay obligations benefit plans trust sell shares use dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations management incentive plans chevrontexaco two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility plans expanded 2002 include former employees texaco caltex mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants texaco also cash incentive program stock incentive plan sip included stock options restricted stock incentive awards executives directors key employees awards caltex ltip form performance units stock appreciation rights charges expense combined management incentive plans excluding expense related ltip sip stock options restricted stock awards discussed note 20 48 101 83 2002 2001 2000 respectively incentive plans company program provides eligible employees annual cash bonus company achieves certain financial safety goals charges program 158 154 230 2002 2001 2000 respectively note 20 stock options company applies apb opinion 25 related interpretations accounting stockbased compensation programs described stockbased compensation credit expense recognized connection programs 2 111 23 2002 2001 2000 respectively pro forma effect net income earnings per share company applied fairvaluerecognition provisions fas 123 shown note 1 broadbased employee stock options 1998 chevron granted eligible employees option varied 100 300 shares stock equivalents dependent employee’s salary job grade options vested two years february 2000 options 4820800 shares awarded exercise price 763125 per share outstanding option shares 3064367 yearend 2000 exercises 653096 forfeitures 44960 reduced outstanding option shares 2366311 end 2001 2002 exercises 295985 forfeitures 61151 reduced outstanding option shares 2009175 end year options expire february 11 2008 company recorded credit expense 2 1 2 options 2002 2001 2000 respectively fair value option share date grant fas 123 estimated 1908 using average results blackscholes models preceding 10 years 10year averages assumption used blackscholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent longterm incentive plan stock options granted ltip extend 10 years date grant effective options granted june 2002 one third options vest first second third anniversaries date grant prior change options granted chevron vested one year date grant options granted texaco sip vested twoyear period rate 50 percent year maximum number shares may granted year 1 percent total outstanding shares common stock january 1 year closing merger october 9 2001 outstanding options granted texaco sip converted chevrontexaco options merger exchange rate 077 options retained provision restored options feature enables participant exercises stock option exchanging previously acquired common stock shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price fair market value common stock day restored option granted restricted shares granted former texaco plan contained performance element satisfied order specified portion shares vest upon merger restricted shares became vested converted chevrontexaco shares merger exchange ratio 077 apart restored options awards may granted former texaco plans amounts charged compensation expense 2002 2001 2000 including former texaco plans 0 110 25 respectively restricted performance shares granted sip follows fair market value stock option granted estimated date grant fas 123 using blackscholes optionpricing model following weightedaverage assumptions fs42 note 20 stock options continued blackscholes weightedaverage fair value chevrontexaco options granted 2002 2001 2000 1859 2045 2234 per share respectively weightedaverage fair value sip restored options granted 2002 texaco options granted 2001 2000 1029 1290 1156 per share summary status stock options awarded company’s ltip well former texaco plans 2002 2001 2000 follows following table summarizes information stock options outstanding including former texaco plans december 31 2002 note 21 contingencies commitments income taxes company estimates income tax expense liabilities annually liabilities generally finalized individual taxing authorities several years end annual period income taxes estimated us federal income tax liabilities settled 1996 chevrontexaco formerly chevron 1993 chevrontexaco global energy inc formerly caltex 1991 texaco california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees december 31 2002 company subsidiaries provide guarantees either directly indirectly 1038 notes contractual obligations affiliated companies 806 third parties discussed major category amounts carried liabilities company’s obligations guarantees provided affiliates 775 relate borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects approximately 50 percent amounts guaranteed expire within 20032006 period remaining guarantees expiring end 2015 terms guarantees company would required perform affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees company provides guarantees 263 relating obligations connection pricing power purchase agreements certain cogeneration affiliates terms guarantees company may required make payments certain conditions affiliates perform agreements provisions recourse third parties assets held collateral pricing guarantees 437 provided third parties including approximately 100 construction loans host governments company’s international upstream operations remaining guarantees 337 provided principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities approximately half total amounts guaranteed expire 2003 remainder expiring 2007 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 200 guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets guarantees 369 relate equilon debt leases connection february 2002 disposition interest equilon shell oil company agreed indemnify company claims arising guarantees company recorded liability guarantees approximately 30 percent debt leases expire within 20032007 period guarantees remaining amounts expiring 2024 indemnities company also provided certain indemnities contingent liabilities equilon motiva shell oil com fs43 note 21 contingencies commitments continued pany saudi refining inc connection february 2002 sale company’s interests investments indemnities cover contingent general liabilities certain contingent environmental liabilities associated unocal patent litigation company would required perform contingent general liabilities become actual liabilities within 18 months sale could required make maximum future payments 300 company recorded liabilities contingencies recourse provisions enabling recovery amounts third parties assets held collateral within five years february 2002 sale buyer’s option company also may required purchase certain assets shell oil company net book value determined time company’s purchase indemnities pertaining contingent environmental liabilities relate assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods chevrontexaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 12 2001 claims relating equilon must asserted later february 13 2009 claims relating motiva must asserted later february 13 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities amounts indemnified net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident company holds assets collateral 2002 company made payments indemnities securitization offbalancesheet arrangements company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2002 approximately 1000 representing 11 percent chevrontexaco’s total current accounts receivables balance securitized chevrontexaco’s total estimated financial exposure arrangements december 31 2002 approximately 75 arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experiencing major defaults collection receivables chevrontexaco would loss exposure connected thirdparty investments securitization arrangements longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate amounts required payments various commitments 2003 1320 2004 1257 2005 1274 2006 1109 2007 1096 2008 2798 total payments agreements 1188 2002 1509 2001 1506 2000 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2003 800 2004 800 2005 900 2006 900 2007 900 2008 2009 1800 minority interests company commitments related preferred shares subsidiary companies accounted minority interest mvp production inc subsidiary variable rate cumulative preferred shares 75 owned one minority holder shares voting redeemable 2003 texaco capital llc wholly owned finance subsidiary issued 65 deferred preferred shares series c dividends amounting 59 series c rate 717 percent compounded annually paid redemption date february 28 2005 unless earlier redemption occurs early redemption may result upon occurrence certain specific events environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemicals concerns company believes material market credit risks operations financial position liquidity result commodities derivatives activities including forward exchange contracts interest rate swaps however results operations financial position certain equity affiliates may affected business activities involving use derivative instruments global operations areas company affiliates significant operations include united states america canada australia united kingdom norway denmark france partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad equatorial guinea democratic republic congo south africa fs44 note 21 contingencies commitments continued indonesia papua new guinea philippines singapore china thailand venezuela argentina brazil colombia trinidad tobago south korea company’s tengizchevroil affiliate operates kazakhstan company’s chevron phillips chemical company llc affiliate manufactures markets wide range petrochemicals plastics worldwide basis manufacturing facilities existence construction united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s dynegy affiliate operations united states canada united kingdom european countries company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states instance december 2002 caltex oil sa pty limited “caltex oil sa” announced signing shareholders agreement south african consortium black economic empowerment partners agreement intended ultimately provide consortium 25 percent equity interest aspects caltex’s operations south africa uncertain whether additional actions taken host governments countries increase public ownership company’s partially whollyowned businesses certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability less 200 time possible maximum net amount could owed chevrontexaco estimated 50 timing settlement exact amount within range estimates uncertain contingencies chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 22 earnings per share basic earnings per share eps includes effects deferrals salary compensation awards invested chevrontexaco stock units certain officers employees company based upon net income less preferred stock dividend requirements diluted eps includes effects deferrals well dilutive effects outstanding stock options awarded company’s stock option programs see note 20 “stock options” following table sets forth computation basic diluted eps fs45 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx pacific exchange march 7 2003 stockholders record numbered approximately 247000 october 9 2001 common stock traded name chevron corporation trading symbol chv restrictions company’s ability pay dividends fs46 fiveyear financial summary chevron dividend premerger supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 “disclosures oil gas producing activities” fas 69 section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo asiapacific geographic area includes activities principally australia china indonesia kazakhstan partitioned neutral zone kuwait saudi arabia papua new guinea philippines thailand “other” geographic category includes activities united kingdom canada denmark netherlands norway trinidad tobago colombia venezuela brazil argentina countries amounts shown affiliated companies chevrontexaco’s 50 percent equity share tengizchevroil tco exploration production partnership operating republic kazakhstan 30 percent equity share hamaca exploration production partnership operating venezuela beginning 2000 company increased ownership tco 45 percent 50 percent january 2001 fs47 table costs incurred exploration property acquisitions development1 includes costs incurred whether capitalized expensed excludes support equipment expenditures includes acquisition costs additional 5 percent interest 2001 includes wells equipment facilities associated proved reserves include properties acquired property exchanges fs48 supplemental information oil gas producing activities continued unaudited table ii capitalized costs related oil gas producing activities existing costs transferred consolidated subsidiary affiliate yearend 2000 previously reported consolidated companies fs49 table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2002 2001 2000 shown following table net income exploration production activities reported pages fs4 fs5 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts pages fs4 fs5 value owned production consumed fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations includes net sulfur income foreign currency transaction gains losses certain significant impairment writedowns miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified management’s discussion analysis pages fs4 fs5 fs50 supplemental information oil gas producing activities continued unaudited table iv results operations oil gas producing activities unit prices costs12 value owned production consumed fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted crude oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel table v reserve quantity information company’s estimated net proved underground oil gas reserves changes thereto years 2002 2001 2000 shown following table proved reserves estimated company asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually company’s reserves advisory committee ensure rigorous professional standards reserves definitions prescribed us securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves include additional quantities may result extensions currently proved areas applying secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods “net” reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate fs51 table v reserve quantity information continued chevrontexaco operates risked service agreement venezuela’s block ll652 located northeast section lake maracaibo chevrontexaco accounting ll652 oil gas activity december 31 2002 recorded 17 million barrels proved crude oil reserves reserve quantities recorded company’s service agreements boscan field venezuela longterm purchase agreement associated service agreement chuchupa field colombia period 20052016 additional columns continued table first columns repeated includes reserves acquired property exchanges includes reserves disposed property exchanges information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevrontexaco significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevrontexaco views reserves development integral part total upstream operations however us securities exchange commission regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 183 million barrels december 31 2002 production began late 2002 oil sands reserves considered standardized measure discounted future net cash flows conventional oil gas reserves found page fs53 fs52 supplemental information oil gas producing activities continued unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves fs53 table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs54 exhibit index e1 filed herewith october 9 2001 company changed name chevron corporation chevrontexaco corporation filings securities exchange commission prior date may found company’s former name copies exhibits contained herein available security holder upon written request secretary’s department chevrontexaco corporation 6001 bollinger canyon road san ramon california 94583 e2item 15 exhibits financial statement schedules reports form 8k following documents filed part report 1 financial statements 2 financial statement schedules included page 31 annual report form 10k financial statement schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 annual report form 10k lists exhibits filed part report b reports form 8k 1 current report form 8k furnished company october 31 2003 report chevrontexaco furnished press release announcing preliminary unaudited third quarter 2003 net income 1975 billion 2 current report form 8k furnished company january 30 2004 report chevrontexaco furnished press release announcing preliminary unaudited net income 17 billion fourth quarter 2003 72 billion year schedule ii valuation qualifying accounts millions dollars signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 9th day march 2004 chevrontexaco corporation david j o’reilly david j o’reilly chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 9th day march 2004 principal executive officers directors david j o’reilly david j o’reilly chairman board chief executive officer peter j robertson peter j robertson vice chairman board principal financial officer john watson john watson vice president finance chief financial officer principal accounting officer stephen j crowe stephen j crowe vice president comptroller samuel h armacost samuel h armacost robert j eaton robert j eaton sam ginn sam ginn carla hills carla hills franklyn g jenifer franklyn g jenifer j bennett johnston j bennett johnston sam nunn sam nunn charles r shoemate charles r shoemate frank shrontz frank shrontz thomas vanderslice thomas vanderslice carl ware carl ware john young john young lydia beebe lydia beebe attorneyinfact index management’s discussion analysis consolidated financial statement supplementary data management’s discussion analysis financial condition results operations fs2 fs20 report management fs21 report independent auditors fs21 consolidated statement income fs22 consolidated statement comprehensive income fs23 consolidated balance sheet fs24 consolidated statement cash flows fs25 consolidated statement stockholders’ equity fs26 fs27 notes consolidated financial statements fs28 fs50 quarterly results stock market data fs51 fiveyear financial summary fs52 supplemental information oil gas producing activities fs52 fs59 fs1 » management’s discussion analysis financial condition results operations key financial results income loss major operating area changes accounting principles net income includes net charges 196 million cumulative effect changes accounting principles primarily 200 million adoption january 1 2003 financial accounting standards board statement 143 “accounting asset retirement obligations” fas 143 refer note 25 consolidated financial statements page fs50 additional discussion also first quarter 2003 company recorded aftertax gain 4 million share affiliate dynegy’s cumulative effect adoption emerging issues task force consensus 023 “issues involved accounting derivative contracts held trading purposes contracts involved energy trading risk management activities” effective january 1 2003 net income period presented includes amounts matters management characterizes “special items” described following table special items nature amount special items identified separately help explain changes net income segment income periods well help distinguish underlying trends company’s core businesses special items discussed detail major operating area “results operations” section beginning page fs6 “restructuring reorganizations” described detail note 12 consolidated financial statements page fs37 categories “mergerrelated expenses” “extraordinary loss mergerrelated asset sales” described detail “texaco merger transaction” section page fs5 business environment outlook shown “special items” table large net specialitem charges adversely affected net income 2002 2001 2002 23 billion 33 billion net charges related company’s investment dynegy inc affiliate refer pages fs10 fs11 discussion matters approximately onehalf 35 billion net charges 2001 related asset impairments primarily result downward revisions crude oil natural gas reserve quantities apart effects special items chevrontexaco’s earnings depend largely profitability business segments upstream exploration production downstream refining marketing transportation overall earnings trends typically less affected results company’s commodity chemicals segment investments company’s longterm competitive position particularly given capitalintensive commoditybased nature industry closely associated company’s ability invest projects provide adequate financial returns manage operating expenses effectively company also continuously evaluates opportunities dispose assets key providing longterm value acquire assets operations complementary asset base help sustain company’s growth addition assetdisposition restructuring plans announced 2003 plans may occur future periods result significant gains losses refer “operating developments” section pages fs4 fs5 discussion includes references company’s asset disposition activities fs2 comments related earnings trends company’s major business areas follows upstream yeartoyear changes exploration production earnings align closely industry price levels crude oil natural gas crude oil natural gas prices subject certain external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damages disruptions competing fuel prices regional supply interruptions may caused military conflicts civil unrest political uncertainties company monitors developments closely countries operates longerterm trends earnings segment also function factors besides price fluctuations including changes company’s oil gas production levels company’s ability find acquire efficiently produce crude oil natural gas reserves company’s overall capital investment upstream businesses particularly outside united states refer “capital exploratory expenditures” pages fs11 fs12 discussion types upstream investments targeted 2004 investments upstream projects oftentimes made well advance start associated crude oil natural gas production industry price levels crude oil early 2003 reached 12year high reaching peak 38 per barrel prices west texas intermediate wti benchmark crude averaged 31 year increase 5 2002 wti spot prices end december 2003 end february 2004 32 36 respectively among things relatively high industry prices reflected increased demand improved economies many countries continued production curtailments opec average spot price west texas intermediate benchmark crude oil rose 19 percent 2002 2003 remained 30 per barrel early 2004 natural gas prices also higher 2003 2002 benchmark prices henry hub us natural gas averaged 5 per thousand cubic feet 2003 versus 3 2002 2003 yearend price nearly 6 per thousand cubic feet dollar higher yearearlier level prices united states typically highest winter period demand heating fuel greatest end february 2004 us benchmark price 5 per thousand cubic feet trend toward higher us natural gas prices mainly result overall demand based upon strength average prices climbed 70 percent 2003 production 7 percent due normal field declines production restored 2002 storm damage facilities gulf mexico net liquids production declined 5 percent 2003 primarily result normal field declines united states includes equity affiliates economy declining levels industry reserves production united states partially offsetting benefit higher crude oil natural gas prices 2003 4 percent decline company’s worldwide oilequivalent production prior year decrease largely result lower production united states due normal field declines production deemed uneconomic restore following storm damages gulf mexico second half 2002 international oilequivalent production also slightly primarily result lower liquids production company’s indonesian operations reduced net production indonesia mainly due effect higher prices costoil recovery volumes productionsharing arrangements expiration productionsharing agreement third quarter 2002 company’s oilequivalent production level future periods uncertain part production quotas set opec potential production disruptions civil unrest changing geopolitics countries company operates holds interests twentytwo percent company’s net oil equivalent production 2003 opecmember countries indonesia nigeria venezuela partitioned neutral zone saudi arabia kuwait although company’s production levels areas constrained 2003 opec quotas future production could affected opecimposed limitations nigeria 45000 barrels per day company’s net production capacity shutin certain onshore areas since march 2003 security concerns company expects reenter area 2004 begin repairing damaged equipment opec production constraints could possibly limit eventual resumption portion production downstream refining marketing transportation earnings closely tied regional supply demand refined products associated effects industry refining marketing margins company’s core marketing areas western southeastern united states western canada asiapacific northern europe africa latin america fs3 » management’s discussion analysis financial condition results operations companyspecific factors influencing company’s profitability segment include operating efficiencies refinery network including downtime due planned maintenance refinery upgrade projects operating incidents downstream earnings improved 2003 compared prior year higher refined product margins company’s operating areas contrast margins 2002 period lowest levels since mid1990s weak market conditions allow rising feedstock costs fully recovered consumers refined products industry margins may volatile future depending primarily price movements crude oil feedstocks strength economies company operates factors chemicals earnings 69 million 2003 lower yearago period depressed earnings years reflected excesssupply conditions commodity chemicals industry kept product margins low levels protracted period significant improvement earnings expected near future operating developments key operating developments events 2003 early 2004 included upstream worldwide oil gas reserves approximately 1 billion barrels oilequivalent reserves added 2003 including sales acquisitions additions equated 108 percent production year 1 billion barrels added nearly 300 million result discoveries extensions including almost 200 million united states contract extensions colombia denmark accounted approximately 200 million additional barrels 100 million barrels added improved recovery techniques primarily indonesia united states finally largest revisions resulted reservoir studies analyses kazakhstan increasing reserves 300 million barrels north america plans initiated improve competitive performance operating efficiency company’s north america exploration production portfolio plans include sale certain nonstrategic producing properties royalty interests united states possibly western canada company expects retain 400 core fields additionally company expects consolidate certain business functions office locations late 2003 four new deepwater discoveries gulf mexico perseus sturgis tubular bells saint malo announced chevrontexaco operator holds 50 percent working interest perseus sturgis prospects nonoperated discoveries company holds 30 percent interest tubular bells 125 percent interest saint malo additionally blind faith discovery agreement reached assume operatorship increase company’s working interest 50 percent tahiti prospect major discovery deepwater gulf mexico appraisal drilling validated presence highquality reservoir sand chevrontexaco operator prospect 58 percent working interest late 2003 appraisal well drilled great white discovery nonoperated exploratory opportunity western gulf mexico company 33 percent working interest prospect australia well drilled 2003 iojansz natural gas field northwest coast western australia test results provided verification field’s extensive production potential chevrontexaco holds 50 percent equity interest wa18r permit area nigeria october 2003 successful results announced aparo3 appraisal well nsiko1 wildcat well deepwater block opl249 company entitled variable equity interest life field addition company announced significant extension 30 percentowned usan field discovery drilling usan4 appraisal well located deepwater block opl222 confirmed presence commercial quantities oil well additional potential previously untested reservoirs early 2003 company announced gas discovery 46 percentowned deepwater block opl218 following completion nnwa2 appraisal well earlier year company partners reached agreement govern future operations offshore block opl216 concession agreement expected enable continued advancement plans develop agbami field company varying funding obligations profit entitlement block opl216 development according terms two productionsharing contracts concession angola major contracts awarded first phase development benguela belize lobito tomboco fields deepwater block 14 first phase involve drilling completion 30 development wells benguela belize fields construction installation drilling production facilities form new production hub block 14 company operator holds 31 percent interest block 14 chadcameroon company’s first cargo crude oil fields southern chad loaded facilities offshore cameroon export world markets late 2003 crude oil produced chad transported 600 miles pipeline floating storage offloading vessel located several miles offshore full production capacity 225000 barrels per day expected reached mid2004 chevrontexaco holds 25 percent equity interest chadcameroon upstream operation 23 percent interest pipeline kazakhstan company’s 50 percentowned affiliate tengizchevroil tco reached agreement government fs4 kazakhstan third quarter 2003 expand operations tengiz korolev fields sour gas injectionsecond generation project expected increase tco’s oil production capacity 285000 barrels per day 430000 500000 barrels per day second half 2006 also 400mile pipeline completed enable production karachaganak field exported world markets via caspian pipeline fully operational mid2004 colombia agreement reached extends company’s production rights northern natural gas fields contract extension chevrontexaco holds 43 percent interest remaining 57 percent held country’s national petroleum company venezuela chevrontexaco awarded license 60 percentowned operated block 2 plataforma deltana prospective natural gas region venezuela’s atlantic continental shelf global natural gas projects gulf mexico company’s permit application approved plans develop port pelican deepwater lng facility company also filed permits construction lng receiving regasification terminal offshore baja california mexico september 2003 gorgon joint venture company 57 percent owner received inprinciple approval western australian government act parliament proceed plans construct natural gas processing facility barrow island decision represented significant milestone company’s plans commercialize large gorgon natural gas resource base also 2003 gorgon joint venture announced agreement china national offshore oil corporation cnooc october negotiate sale gorgon liquefied natural gas people’s republic china agreement subject completion formal contracts enables cnooc purchase interest gorgon gas development project facilitate sale lng chinese market nigeria company partners brass river consortium agreed advance plans frontend engineering design work new lng facility brass river studies expected completed 2004 new us wholesale natural gas marketing unit became fully operational april 2003 business unit established following decision company’s dynegy affiliate exit natural gas marketing trading business chevrontexaco’s natural gas sale purchase agreements dynegy terminated end january 2003 downstream company initiated major restructuring global refining marketing supply trading organizations order lower costs improve efficiency achieve sustained improvements financial performance relative competitors organization changed geographical global functional alignment implemented beginning 2004 downstream asset dispositions including sale el paso texas refinery approximately 400 service stations various markets completed 2003 improve returns focusing investment areas strongest longterm growth returns facility upgrade projects refineries pascagoula mississippi pembroke united kingdom rotterdam netherlands completed resulting increased product yields enabling manufacture lowsulfur fuels philippines batangas refinery converted finishedproduct terminal chemicals qatar new olefins polyolefins complex commissioned 2003 complex owned operated joint venture company’s 50 percentowned equity affiliate chevron phillips chemical company cpchem qatar general petroleum cpchem holds 49 percent interest joint venture texaco merger transaction basis presentation october 2001 texaco inc texaco became wholly owned subsidiary chevron corporation chevron pursuant merger transaction chevron changed name chevrontexaco corporation certain operations jointly owned combining companies consolidated accompanying financial statements operations primarily caltex group companies previously owned 50 percent chevron texaco combination accounted pooling interests accompanying audited consolidated financial statements periods presented chevron texaco always combined merger effects mandate federal trade commission ftc condition approval merger company sold interests equilon motiva joint ventures engaged us downstream businesses february 2002 resulting cash proceeds 22 billion indemnification chevrontexaco certain equilon motiva contingent liabilities date sale discussed “guarantees offbalancesheet arrangements contractual obligations contingencies” section beginning page fs13 mandated asset dispositions also completed 2002 net income cash proceeds asset sales material assets sold result merger provided net income approximately 375 million 2001 net loss assets sold ftc mandate presented 2001 income statement extraordinary item company incurred beforetax mergerrelated expenses approximately 16 billion 11 billion tax 576 million 386 million tax 2001 2002 respectively major expenses included employee severance payments incremental pension medical plan benefit costs associated workforce reductions legal accounting securities exchange commission sec filing investment banker fees employee office relocations costs elimination redundant fs5 » management’s discussion analysis financial condition results operations facilities operations significant mergerrelated expenses occurred 2003 results operations major business areas following section presents results operations company’s business segments well departments companies managed corporate level aid understanding changes segment income periods discussion two parts first relating underlying operational trends second respect special items tended obscure underlying trends following discussions term “earnings” defined net income segment income cumulative effect changes accounting principles us exploration production improvement 2003 segment income 2002 primarily result higher prices crude oil natural exploration expenses declined october 2001 merger reflecting part highgrading combined exploration portfolio earnings increased significantly 2003 higher prices crude oil natural gas partially offsetting effects lower production foreign currency losses cumulative effect changes accounting principles gas partially offsetting effect decline oilequivalent production change 2001 2002 reflected significantly lower natural gas realizations lower production 2002 period company’s average 2003 us liquids realization 2666 per barrel compared 2134 2002 essentially 2001 average natural gas realization 501 per thousand cubic feet 2003 compared 289 438 2002 2001 respectively net oilequivalent production averaged 933000 barrels per day 2003 7 percent 2002 12 percent 2001 net liquids component 2003 averaged 562000 barrels per day decline 7 percent 2002 8 percent 2001 net natural gas production averaged 2228 billion cubic feet per day 2003 7 percent lower 2002 18 percent lower 2001 oilequivalent production decline 2003 associated mainly normal field declines absence 10000 15000 barrels per day production company deemed uneconomic restore following storm damages gulf mexico late 2002 storms reduced company’s 2002 oilequivalent production 20000 barrels per day net specialitem charges 64 million 2003 reflected asset impairments 103 million associated mainly writedown assets anticipation sale restructuring reorganization charges 38 million mainly associated employee severance costs offsetting portion charges gains 77 million asset sales special items 2002 2001 included asset impairments caused writedowns proved oil gas reserve quantities number fields amount 2001 related primarily midway sunset field california’s san joaquin valley determination lowerthanprojected heavy oil recovery would result steaminjection process international exploration production earnings improvement 2002 2003 included benefit higher crude oil natural gas prices partially offsetting improvements effects lower oilequivalent production unfavorable swing foreign currency effects net foreign currency losses 319 million 2003 primarily related significant weakening us dollar fs6 currencies canada australia united kingdom earnings improvement 2002 vs 2001 marginally affected combination factors including benefits higher liquids realizations higher natural gas production lower exploration income tax expenses offset part effects lower liquids production lower natural gas realizations higher depreciation expense average liquids realization including equity affiliates 2679 per barrel 2003 compared 2306 2002 2217 2001 average natural gas realization 264 per thousand cubic feet 2003 compared 214 2002 236 2001 daily net liquids production 1246 million barrels 2003 decreased 4 percent 1295 million barrels 2002 7 percent 1345 million barrels 2001 2003 production decline included 29000 barrels per day indonesia related primarily effect lower costoil recovery volumes productionsharing terms 2003 expiration productionsharing arrangement third quarter 2002 new production occurred chad 2003 higher volumes produced united kingdom venezuela 2002 production decline prior year included lower output indonesia primarily due changes contractual terms nigeria mainly associated opec constraints effects partially offset increased production kazakhstan net natural gas production 2064 billion cubic feet per day 2003 5 percent 2002 20 percent 2001 2003 output higher australia kazakhstan philippines united kingdom 2002 areas production increases 2001 included philippines kazakhstan nigeria australia special items 2003 composed benefits totaling 150 million related income taxes property sales partially offset asset impairments charges employee termination costs 2002 special items included asset impairments connected writedowns quantities proved oil gas reserves fields africa canada 2001 special items included 247 million impairment ll652 field venezuela us refining marketing transportation us refining marketing transportation earnings 2003 reflected primarily recovery industry margins refined products especially west coast margins 2002 depressed one point hovered near 12year lows results 2001 included earnings 375 million associated assets later sold condition merger included company’s equilon motiva joint ventures sales volumes refined products 1514 million barrels per day 2003 decreased 5 percent 2002 demand weaker branded gasoline diesel jet fuels lower sales certain supply contracts branded gasoline refined products sales volumes decreased 5 percent 2002 decline partially reflected august 2003 sale el paso texas refinery includes equity affiliates us downstream earnings 2003 rebounded loss 2002 primarily due recovery industry margins refined products sales volumes 557000 barrels per day 4 percent lower 2002 branded gasoline sales increased approximately 4 percent compared 2001 volumes average us refined products sales realization 3993 per barrel 2003 average 3263 per barrel 3626 per barrel 2002 2001 respectively special items 2003 included 160 million reserves environmental remediation employee severance costs associated global downstream restructuring reorganization charges partially offset gains primarily sale service stations 2002 special items included environmental remediation provisions asset writedowns certain refining marketing assets litigation charge international refining marketing transportation international refining marketing transportation segment includes company’s consolidated refining marketing businesses international marine operations international supply trading activities equity earnings affiliates primarily asiapacific region united states international downstream earnings increased improved refinedproduct margins industry decline earnings 2001 2002 reflected trend refined product margins also 200 million unfavorable shift foreign currency effects periods total international refined products sales volumes 2224 million barrels per day 2003 2 percent fs7 » management’s discussion analysis financial condition results operations refined products sales volumes increased 2 percent 2002 includes equity affiliates protracted weak demand commodity chemicals industry oversupply continue suppress chemical earnings includes equity affiliates 2175 million 2002 9 percent lower 2454 million 2001 weak economic conditions dampened demand 2002 special items 189 million 2003 included charges writedown batangas refinery philippines advance conversion product terminal facility employee severance benefits associated global downstream restructuring reorganization addition special charges 70 million recognized impairment assets anticipation sale company’s share losses asset sale asset impairment equity affiliate special item 2002 writedown company’s investment publicly traded caltex australia limited affiliate estimated fair value chemicals includes company’s oronite division equity earnings company’s 50 percentowned chevron phillips chemical company llc cpchem affiliate protracted weak demand commodity chemicals industry oversupply conditions continued suppress earnings sector special items 2001 included writedowns cpchem puerto rico operations consists company’s interest dynegy coal mining operations power gasification businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies change net charges 2002 2003 largely attributable differences effects special items 2003 period also included lower interest expense corporate charges compared 2002 aside effect special items 2001 2002 net change also reflected lower corporate charges net interest expense well increase favorable tax adjustments 245 million special items 2003 included benefit 365 million exchange company’s investment dynegy preferred stock cash dynegy securities benefit partially offset charges asset writedowns 84 million primarily gasification business 40 million company’s share asset impairment dynegy employee severance costs 16 million special items 2002 included 23 billion related dynegy composed 16 billion writedown company’s investment dynegy common preferred stock estimated fair value 680 million company’s share dynegy’s special items asset writedowns revaluations loss asset sale refer also pages fs10 fs11 “information relating company’s investment dynegy” refer “texaco merger transaction” page fs5 information related special items 2001 “mergerrelated expenses” “extraordinary loss mergerrelated asset sales” consolidated statement income following table amounts special items income statement category shown order assist explanation changes categories periods addition effects special items shown table separately disclosed face consolidated income statement 2003 gain exchange dynegy inc securities mergerrelated expenses fs8 writedown investments dynegy inc cumulative effect changes accounting principles extraordinary aftertax loss sale assets mandated condition merger matters discussed elsewhere mda notes 2 14 consolidated financial statements pages fs30 fs38 explanations follow variations years amounts table consideration effects special items well income statement categories refer preceding segment discussions section information relating special items sales operating revenues 120 billion 2003 compared 99 billion 2002 104 billion 2001 revenues increased 2003 primarily significantly higher prices crude oil natural gas refined products worldwide total sales operating revenues 2002 declined 2001 due lower average realizations crude oil refined products well lower prices sales volumes natural gas united states income loss equity affiliates increased 2003 earnings improved number affiliates including tengizchevroil lgcaltex cpchem 2001 income equity affiliates included earnings assets subsequently sold condition merger income 2003 reflected significantly higher foreign currency losses likewise foreign currency effects largely contributed lower “other income” 2002 vs 2001 foreign currency losses 2003 excluding foreign currency gains losses affiliates included “income loss equity affiliates” 199 million compared loss 5 million gain 121 million 2002 2001 respectively 2003 losses resulted primarily weakening us dollar currencies canada australia united kingdom 2002 foreign currency losses related currencies countries company sig nificant operations appreciating us dollar income 2002 also reflected lower interest income purchased crude oil products costs 72 billion 2003 increased 25 percent 2002 increase result significantly higher prices crude oil natural gas refined products crude oil products purchase costs decreased 5 percent 2002 primarily due lower natural gas prices reduced natural gas volumes operating selling general administrative expenses 13 billion increased 12 billion 2002 800 million increase 2003 resulted higher freight rates international shipping operations higher costs employee pension plans employeebenefit 8 percent increase 2003 resulted primarily higher costs transportation shipping pension plans employee benefits expenses 2002 operating selling general administrative expenses increased approximately 95 million 2001 primarily higher pension expense payroll employee benefit costs refer note 21 “employee benefit plans” beginning page fs42 discussion costs associated company’s pension plans employee benefits comparative periods exploration expenses 571 million 2003 591 million 2002 1 billion 2001 well writeoffs higher 2001 comparative periods depreciation depletion amortization expenses change materially reporting periods consideration effects special items mergerrelated expenses 576 million approximately 16 billion 2002 2001 respectively mergerrelated expenses recorded 2003 reflecting completion merger integration activities 2002 taxes income 179 billion 167 billion 152 billion 2003 2002 2001 respectively increase 2003 primarily reflected weakening us dollar 2003 foreigncurrencydenominated duties company’s european downstream operations 2002 increase periods resulted higher sales volumes united kingdom along currency effects weaker us dollar company’s european downstream operations interest debt expense 474 million 2003 compared 565 million 2002 833 million 2001 declines periods reflected lower average interest rates commercial paper variable rate debt lower average debt levels fs9 » management’s discussion analysis financial condition results operations income tax expense corresponded effective tax rates 43 percent 2003 45 percent 2002 2001 taking account effect special items see also note 16 pages fs40 fs41 “taxes” notes consolidated financial statements selected operating data mbpd thousands barrels per day mmcfpd millions cubic feet per day mboepd thousands barrels oil equivalents per day bbl barrel mcf thousands cubic feet oilequivalent gas oeg conversion ratio 6000 cubic feet gas 1 barrel oil information related investment dynegy inc chevrontexaco owns approximate 26 percent equity interest common stock dynegy energy merchant engaged power generation natural gas liquids processing marketing regulated energy delivery company also holds investments dynegy notes preferred stock investment dynegy common stock december 31 2003 carrying value company’s investment dynegy common stock approximately 150 million amount 425 million company’s proportionate interest dynegy’s underlying net assets difference resulted writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary approximate 425 million difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors giving rise decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly reflect difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2003 415 million investments dynegy notes preferred stock beginning 2003 company held 15 billion aggregate principal amount dynegy series b preferred stock due redemption par value november 2003 august company exchanged preferred stock 225 million cash 225 million face value dynegy junior unsecured subordinated notes due 2016 400 million face value dynegy series c convertible preferred stock stated maturity 2033 company recorded junior notes series c preferred stock date exchange fair values 170 million 270 million respectively total 440 million together 225 million cash total amount recorded date exchange 665 million gain 365 million included net income date difference 665 million fair value received net balance sheet amount 300 million associated series b shares december 31 2003 estimated fair values junior notes series c shares totaled 530 million 90 million increase 440 million recorded august recorded “investments advances” offsetting amount “other comprehensive income” future temporary changes estimated fair values new securities likewise reported “other comprehensive income” however future decline fair value deemed temporary charge income period would recorded interest accrues notes dividends payable preferred stock recognized income period addition 365 million gain recorded income third quarter 2003 company recorded 170 million directly “retained earnings” latter amount represented company’s approximate 26 percent equity share gain recorded dynegy connection series b exchange transaction accounting rules applicable preferred fs10 stock redemptions chevrontexaco increased earnings per share third quarter 2003 016 effect 170 million recorded directly “retained earnings” february 2004 dynegy announced agreement sell illinois power subsidiary ameren corporation sale conditioned upon among things receipt approvals governmental regulatory agencies pending approvals acquisition expected close fourth quarter 2004 sale illinois power triggers mandatory prepayment provision dynegy junior notes held company terms provision 75 percent net proceeds including amounts used payment debt associated illinois power used retire par plus accrued interest 225 million face value notes liquidity capital resources cash equivalents marketable securities totaled 53 billion 38 billion december 31 2003 2002 respectively cash provided operating activities 2003 123 billion compared 99 billion 2002 115 billion 2001 2003 increase cash provided operating activities mainly higher earnings helped boost company’s operating cash flow 24 percent interest expense fell 16 percent significantly lower debt levels reflected higher earnings us upstream worldwide downstream businesses cash provided asset sales 11 billion 2003 23 billion 2002 300 million 2001 2002 company received proceeds 22 billion including dividends due ftcmandated sale company’s investments equilon motiva cash provided operating activities 2003 generated sufficient funds company’s capital exploratory expenditure program payment dividends stockholders well contributing significantly reduction 37 billion debt levels 14 billion funding company’s pension plans increase cash equivalents marketable securities dividends payments approximately 3 billion 2003 2002 29 billion 2001 made dividends distributions common stock preferred stock minority interests debt capital lease minority interest obligations chevrontexaco’s total debt capital lease obligations totaled 126 billion december 31 2003 163 billion yearend 2002 company also minority interest obligations 268 million 303 million december 31 2002 company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 6 billion december 31 2003 95 billion december 31 2002 amounts 43 billion 41 billion respectively reclassified longterm end period settlement obligations yearend 2003 expected require use working capital 2004 company intent ability evidenced committed credit facilities refinance longterm basis company’s practice continually refinance commercial paper maintaining levels believes appropriate yearend 2003 chevrontexaco 43 billion committed credit facilities various major banks permit refinancing shortterm obligations longterm basis facilities support commercial paper borrowings also used general credit requirements borrowings outstanding facilities year yearend 2003 addition company three existing effective “shelf” registrations file securities exchange commission sec together would permit additional registered debt offerings aggregate 38 billion debt securities 2003 company issued 1 billion new longterm debt financing obligations including 750 million 3375 percent chevrontexaco capital notes due february 2008 265 million new philippine debt 19 million individually smaller issues proceeds chevrontexaco capital company note issue used retire commercial paper repayments longterm debt included 665 million texaco capital inc bonds 143 million philippine debt 110 million chevrontexaco corporation 811 percent notes 128 million nigerian debt 91 million individually smaller issues additionally 210 million payment made republic kazakhstan relating company’s 1993 acquisition interest tco joint venture also included company’s longterm debt levels noncash reduction 50 million esop debt chevrontexaco’s senior debt rated aa standard poor’s corporation aa2 moody’s investor service except senior debt texaco capital inc rated aa3 chevrontexaco’s us commercial paper rated a1 standard poor’s prime 1 moody’s company’s canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions company believes substantial borrowing capacity meet unanticipated cash requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals company believes flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings capital exploratory expenditures 2003 totaled 74 billion including company’s equity share affiliates’ expenditures capital exploratory expenditures 93 billion 2002 12 billion 2001 chevrontexaco’s equity share affiliates’ expenditures 11 billion 14 billion 17 billion 2003 2002 2001 respectively require cash outlays company expenditures 57 billion fs11 » management’s discussion analysis financial condition results operations international projects accounted 71 percent worldwide exploration production expenditures 2003 includes equity affiliates 2003 exploration production activities represented 77 percent total outlays year compared 68 percent 2002 59 percent 2001 international exploration production spending 40 billion 71 percent worldwide exploration production expenditures 2003 compared 70 percent 2002 66 percent 2001 reflecting company’s continuing focus international exploration production activities expenditures 2003 19 billion lower prior year primarily due amounts spent 2002 large lease acquisitions north sea gulf mexico athabasca oil sands project western canada additional common stock investments dynegy largest expenditures 2003 included upstream projects eurasia west africa gulf mexico expenditures 2002 included lower additional investments equity affiliates 2001 due absence company’s share expenditures equilon motiva investments sold condition merger 2001 expenditures included additional investments tco dynegy including purchase 15 billion dynegy preferred stock including share spending affiliates company estimates 2004 capital exploratory expenditures 85 billion 15 percent higher spending 2003 64 billion 75 percent total targeted exploration production activities 45 billion outside united states upstream spending targeted promising exploratory prospects nigeria angola deepwater gulf mexico major development projects kazakhstan venezuela africa included upstream expenditures 400 million commercialize company’s international natural gas resource base including construction additional liquefied natural gas lng facilities help meet future demand natural gas additional lng expenditures 100 million included segments 2004 capital program worldwide downstream spending estimated 14 billion 1 billion amount refining marketing 400 million supply transportation projects investments chemicals budgeted 200 million estimates power related businesses 150 million remaining 300 million primarily emerging technologies information technology infrastructure capital exploratory expenditures fs12 pension obligations 2003 contributions us plans totaled 12 billion early 2004 company contributed 535 million us pension plans additionally company anticipates contributing 50 million us plans remainder year years subsequent 2004 company expects contributions us pension plans 250 million per year approximately equal cost benefits earned year 2003 contributions international pension plans 214 million contributions 200 million anticipated 2004 actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs18 financial ratios current ratio current assets divided current liabilities generally two items adversely affected chevrontexaco’s current ratio company’s opinion affect liquidity first current assets years included inventories valued lifo basis yearend 2003 lower replacement costs based average acquisition costs year approximately 21 billion second company benefits lower interest rates available shortterm debt continually refinancing commercial paper however company’s proportionately large amount shortterm debt 2002 2001 kept current ratio relatively low levels interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs company’s interest coverage ratio higher 2003 primarily due higher beforetax income lower average debt balances lower market interest rates debt ratio total debt divided total debt plus equity ratio approximately 26 percent december 31 2003 compared 34 percent year earlier financial ratios guarantees offbalancesheet arrangements contractual obligations contingencies direct indirect guarantees amounts exclude indemnifications contingencies associated sale company’s interest equilon motiva 2002 discussed “indemnifications” section page fs14 december 31 2003 company subsidiaries provided guarantees either directly indirectly 917 million guarantees notes contractual obligations affiliated companies 256 million third parties described major category amounts carried liabilities company’s obligations guarantees 917 million guarantees provided affiliates 716 million relate borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects approximately 75 percent amounts guaranteed expire 2004 remaining guarantees expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees company provides guarantees 201 million relating obligations connection pricing power purchase agreements certain cogeneration affiliates terms guarantees company may required make payments certain conditions affiliate perform agreements recourse provisions third parties assets held collateral pricing guarantees 256 million provided third parties including guarantees approximately 110 million construction loans host governments company’s international upstream operations remaining guarantees 146 million provided principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities 75 percent total amounts guaranteed expire 2004 remainder expiring 2004 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 100 million guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets december 31 2003 chevrontexaco outstanding guarantees approximately 238 million equilon debt leases following february 2002 disposition interest equilon company received indemnification shell fs13 » management’s discussion analysis financial condition results operations oil company shell claims arising guarantees accordingly company recorded liability guarantees approximately 50 percent amounts guaranteed expire within 20042008 period guarantees remaining amounts expiring 2019 indemnifications company also provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments indemnities cover certain contingent liabilities including associated unocal patent litigation company would required perform indemnified liabilities become actual losses could required make maximum future payments 300 million company paid approximately 28 million contingencies disputed approximately 34 million claims submitted shell indemnities shell requested arbitration dispute expected occur mid2004 recourse provisions enabling recovery amounts third parties assets held collateral within five years february 2002 sale buyer’s option company also may required purchase certain assets shell respective net book values determined time company’s purchase terms company purchased two lubricant facilities late 2003 immaterial amounts company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods chevrontexaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon must asserted later february 2009 claims relating motiva must asserted later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company holds assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 specific incident securitization offbalancesheet arrangements company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2003 approximately 1 billion representing 11 percent chevrontexaco’s total current accounts receivable balance securitized chevrontexaco’s total estimated financial exposure arrangements december 31 2003 approximately 75 million arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experienced major defaults collection receivables chevrontexaco believes would loss exposure connected thirdparty investments securitization arrangements longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate amounts required payments various commitments 2004 12 billion 2005 11 billion 2006 1 billion 2007 1 billion 2008 1 billion 2009 19 billion total payments agreements approximately 14 billion 2003 12 billion 2002 15 billion 2001 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2004 700 million 2005 800 million 2006 800 million 2007 800 million 2008 800 million 2009 800 million minority interests company commitments related preferred shares subsidiary companies accounted minority interest texaco capital llc wholly owned finance subsidiary issued 65 million deferred preferred shares series c dividends approximately 60 million series c rate 717 percent compounded annually paid redemption date february 2005 unless earlier redemption occurs early redemption may result upon occurrence certain specific events mvp production inc subsidiary redeemed variable rate cumulative preferred shares 75 million owned one minority holder 2003 fs14 following table summarizes company’s significant contractual obligations contractual obligations 1 4285 shortterm debt company expects refinance included longterm debt repayment schedule reflects expiration company’s committed credit facilities although facilities may renewed upon expiration 2 includes guarantees 385 lesop debt 25 due 2004 360 due 2007 company also obligations connected asset retirements pension plans contractually fixed timing amount financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related volatility crude oil refined products natural gas refinery feedstock prices company uses derivative commodity instruments manage exposure price volatility small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids company also uses derivative commodity instruments trading purposes results material company’s financial position net income cash flows 2003 company’s positions monitored managed daily basis internal risk control group ensure compliance company’s risk management policy approved audit committee company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures contracts traded new york mercantile exchange international petroleum exchange crude oil natural gas swap contracts options derivative products entered principally major financial institutions oil gas companies virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally market quotes independent thirdparty quotes aggregate effect 10 percent change prices derivative contracts natural gas crude oil petroleum products would approximately 20 million hypothetical effect contracts estimated calculating cash value contracts difference hypothetical contract delivery prices multiplied contract amounts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect foreign exchange contracts hypothetical 10 percent change yearend exchange rates would approximately 35 million interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income 2003 new swaps initiated yearend 2003 weighted average maturity “receive fixed” interest rate swaps approximately five years “receive floating” swaps outstanding year end hypothetical 10 percent increase interest rates upon interest rate swaps would cause fair value “receive fixed” swaps decline “receive floating” swaps increase aggregate effect changes would approximately 10 million transactions related parties chevrontexaco enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements january 2003 chevrontexaco dynegy agreed terminate natural gas sale purchase agreements internationally longterm purchase agreements place company’s refining affiliate thailand refer page fs14 discussion management believes foregoing agreements others negotiated terms consistent would negotiated unrelated party litigation contingencies unocal patent litigation chevron texaco four oil companies refiners filed suit 1995 contesting validity patent ‘393’ patent granted unocal corporation unocal certain reformulated gasoline blends chevrontexaco sells reformulated gasolines california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocal’s patent valid enforceable assessed damages 575 cents per gallon gasoline produced summer 1996 infringed claims patent february 2001 us supreme court concluded would review lower court’s ruling case sent back district court accounting infringing gasoline produced august 1 1996 district court ruled fs15 » management’s discussion analysis financial condition results operations pergallon damages awarded jury limited infringement occurs california additionally us patent trademark office uspto granted three petitions refiners reexamine validity unocal’s ‘393’ patent twice rejected claims ‘393’ patent rejections appealed unocal uspto board appeals district court judge requested briefing advised would enter final judgment case uspto completed reexamination ‘393’ patent 2002 2003 uspto granted two petitions reexamination another unocal patent ‘126’ patent uspto rejected validity claims ‘126’ patent could affect larger share us gasoline production separately march 2003 federal trade commission ftc filed complaint unocal alleging conduct pendency patents violation antitrust law november 2003 administrative law judge dismissed complaint brought ftc appealed decision unocal obtained additional patents could affect larger share us gasoline production chevrontexaco believes additional patents invalid unenforceable andor infringed company’s financial exposure event unfavorable conclusions patent litigation regulatory reviews may include royalties plus interest production gasoline proved infringed patents competitive financial effects company’s refining marketing operations although presently indeterminable could material chevrontexaco accruing normal course business future estimated liability potential infringement ‘393’ patent covered 1998 trial court’s ruling 2000 prior merger chevron texaco made payments unocal totaling approximately 30 million original court ruling including interest fees mtbe another issue involving company petroleum industry’s use methyl tertiary butyl ether mtbe gasoline additive potential environmental impact seepage groundwater along oil companies company party 60 lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period chevrontexaco reduced use mtbe gasoline manufactures united states including complete phaseout mtbe california end 2003 environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold following table displays annual changes company’s beforetax environmental remediation reserves including superfund sites 2003 company recorded additional provisions estimated remediation costs primarily refined products marketing sites various closed divested facilities united states december 31 2003 chevrontexaco identified environmental protection agency epa regulatory agencies provisions us superfund law potentially responsible party otherwise involved remediation 218 sites company’s remediation reserve sites yearend 2003 113 million superfund law provides joint several liability responsible parties future actions epa regulatory agencies require chevrontexaco assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although amount future costs may material company’s results operations period recognized company expect costs material adverse effect consolidated financial position liquidity also company believe obligations make expenditures significant fs16 impact company’s competitive position relative petroleum chemicals companies prior january 1 2003 additional reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives included costs related environmental issues recognized unitofproduction basis effective january 1 2003 company implemented financial accounting standards board statement 143 “accounting asset retirement obligations” fas 143 fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability reasonably estimated liability balance asset retirement obligations yearend 2003 29 billion refer also note 25 page fs50 related fas 143 company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer “environmental matters” additional information related environmental matters income taxes company estimates income tax expense liabilities annually liabilities generally finalized individual taxing authorities several years end annual period income taxes estimated us federal income tax liabilities settled 1996 chevrontexaco formerly chevron 1993 chevrontexaco global energy inc formerly caltex 1991 texaco california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination global operations chevrontexaco affiliates operations 180 countries areas company affiliates major operations include united states canada australia united kingdom norway denmark france partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad cameroon equatorial guinea democratic republic congo south africa indonesia philippines singapore china thailand venezuela argentina brazil colombia trinidad tobago south korea company’s tengizchevroil affiliate operates kazakhstan company’s caspian pipeline consortium cpc affiliate operates russia kazakhstan company’s chevron phillips chemical company llc affiliate manufactures markets wide range petrochemicals worldwide basis manufacturing facilities united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken host governments increase public ownership company’s partially wholly owned businesses andor impose additional taxes royalties company’s operations certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability approximately 200 million time possible maximum net amount could owed chevrontexaco estimated 50 million timing settlement exact amount within range estimates uncertain suspended wells company also suspends costs exploratory wells pending final determination commercial potential related oil gas fields ultimate disposition well costs dependent results future drilling activity andor development decisions company decides continue development costs wells expensed december 31 2003 company 658 million suspended exploratory wells included properties plant equipment increase 208 million 2002 decrease 30 million 2001 increase 2003 primarily reflects drilling activities united states nigeria contingencies chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant may take lengthy periods time resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business fs17 » management’s discussion analysis financial condition results operations accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevrontexaco sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative andor remedial work meet current standards using definitions guidelines established american petroleum institute chevrontexaco estimated worldwide environmental spending 2003 approximately 11 billion consolidated companies included expenditures 305 million environmental capital expenditures 820 million costs associated control abatement hazardous substances pollutants ongoing operations 2004 total worldwide environmental capital expenditures estimated 430 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section critical accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting critical criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation oil gas reserves sec rules require “geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” page fs57 changes estimates three years ending december 31 2003 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs59 estimates provedreserve values yearend 20012003 based yearend prices time note 1 consolidated financial statements includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment property plant equipment investments affiliates” pages fs19 fs20 includes reference conditions downward revisions proved reserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs28 development selection accounting estimates assumptions including deemed critical associated disclosures discussion discussed management audit committee board directors areas accounting associated critical estimates assumptions made company follows pension postretirement benefit plans determination pension plan expense requirements funding company’s major pension plans based number actuarial assumptions two critical assumptions rate return pension plan assets discount rate applied pension plan obligations postretirement employee benefit opeb plans provide certain health care life insurance qualifying retired employees funded critical assumptions determining opeb expense discount rate applied benefit obligations assumed health care costtrend rates used calculation benefit obligations fs18 note 21 consolidated financial statements beginning page fs42 includes information three years ending december 31 2003 components pension opeb expense underlying discount rate assumptions well funded status company’s pension plans end 2003 2002 determine estimate longterm rate return pension assets company employs rigorous process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass risk factors asset allocations regularly updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies example december 31 2003 2002 estimated longterm rate return us pension plan assets account 70 percent company’s pension plan assets 78 percent compared 9 percent end 2001 yearend marketrelated value us pensionplan assets used determination pension expense based market values preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year discount rate used determination pension benefit obligations pension expense based highquality fixed income investment interest rates december 31 2003 company calculated us pension obligations using 60 percent discount rate discount rates used end 2002 2001 68 percent 73 percent respectively increase expected return pension plan assets discount rate would reduce pension plan expense vice versa total pension expense 2003 697 million indication interestrate sensitivity determination pension expense 1 percent increase expected return assets company’s primary us pension plan accounted 61 percent companywide pension obligation would reduced total pension plan expense 2003 approximately 30 million 1 percent increase discount rate plan would reduced total benefit plan expense approximately 120 million actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets based expected changes pension plan asset values pension obligations 2004 company believe significant funding pension plans mandatory year us plans determination made accordance minimum funding standard employee retirement income security act erisa however company made discretionary contributions 535 million us plans early 2004 later 2004 additional discretionary payments 200 million 50 million international us plans respectively anticipated pension expense included consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments depending upon funding status different plans either longterm prepaid asset longterm liability recorded plans overfunding underfunding respectively unfunded accumulated benefit obligation excess recorded liabilities recorded “other comprehensive income” see note 21 consolidated financial statements beginning page fs42 pensionrelated balance sheet effects end 2003 2002 company’s opeb plans expense 2003 228 million also recorded “operating expenses” “selling general administrative expenses” business segments discount rate applied company’s us opeb obligations december 31 2003 60 percent discount rate used us pension obligations assumed health care costtrend rates used calculate opeb obligations starting 2003 84 percent cost increase previous year gradually dropping four years longterm ultimate rateincrease assumption 45 percent 2007 thereafter health care costtrend increase assumption duration reach rate company estimates developed consultation external consultants consistent company’s actual experience indication discountrate sensitivity determination opeb expense 2003 1 percent increase discount rate company’s primary us opeb plan accounted significant majority companywide opeb obligation would decreased opeb expense approximately 10 million impairment property plant equipment investments affiliates company assesses property plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices oil gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses outlook global regional market supply demand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions amount income statement classification major impairments ppe three years ending december 31 2003 included commentary business segments elsewhere discussion well note 3 consolidated financial statements pages fs30 fs31 estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded fs19 » management’s discussion analysis financial condition results operations income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets estimated proceeds less associated carrying values contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income refer business segment discussions elsewhere discussion note 3 consolidated financial statements pages fs30 fs31 effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2003 estimate sensitivity earnings periods assumptions used recording liabilities practical number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards january 2003 financial accounting standards board fasb issued interpretation 46 consolidation variable interest entities” fin 46 fin 46 amended accounting research bulletin arb 51 “consolidated financial statements” established standards determining circumstances variable interest entity vie consolidated primary beneficiary fin 46 also requires disclosures vies company required consolidate significant variable interest december 2003 fasb issued fin 46r included amendments fin 46 also required application interpretation affected entities later march 31 2004 calendaryear reporting companies prior requirement however companies must apply interpretation specialpurpose entities december 31 2003 adoption fin 46r relates specialpurpose entities material impact company’s results operations financial position liquidity company expect material impact upon full adoption interpretation march 31 2004 accounting mineral interests investment sec questioned certain public companies oil gas mining industries proper accounting reporting acquired contractual mineral interests fasb statement 141 “business combinations” fas 141 fasb statement 142 “goodwill intangible assets” fas 142 accounting standards became effective company july 1 2001 january 1 2002 respectively issue whether mineral interest costs classified balance sheet part “properties plant equipment” “intangible assets” company continue classify costs “properties plant equipment” apportion expense future periods company’s existing accounting policy authoritative guidance provided chevrontexaco net book values category mineral interest investment december 31 2003 2002 38 billion 41 billion respectively reclassification balances becomes necessary company’s statements income cash flows would affected however additional disclosures related intangible assets would required prescribed associated accounting standards fs20 report management stockholders chevrontexaco corporation management chevrontexaco responsible preparing accompanying financial statements ensuring integrity objectivity statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgments company’s statements audited pricewaterhousecoopers llp independent auditors selected audit committee approved stockholders management made available pricewaterhousecoopers llp company’s financial records related data well minutes stockholders’ directors’ meetings management company established maintains system internal accounting controls designed provide reasonable assurance assets safeguarded transactions properly recorded executed accordance management’s authorization books records accurately reflect disposition assets system internal controls includes appropriate division responsibility company maintains internal audit department conducts extensive program internal audits independently assesses effectiveness internal controls audit committee composed directors officers employees company meets regularly members management internal auditors independent auditors discuss adequacy company’s internal controls financial statements nature extent results audit effort internal independent auditors free direct access audit committee without presence management report independent auditors stockholders board directors chevrontexaco corporation opinion consolidated financial statements listed index appearing item 15a1 page 30 present fairly material respects financial position chevrontexaco corporation subsidiaries december 31 2003 2002 results operations cash flows three years period ended december 31 2003 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a 2 page 30 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance auditing standards generally accepted united states america require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 25 page fs50 financial statements company changed method accounting asset retirement obligations january 1 2003 pricewaterhousecoopers llp san francisco california february 25 2004 fs21 » consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs22 » consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs23 » consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs24 » consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs25 » consolidated statement stockholders’ equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs26 » consolidated statement stockholders’ equity continued shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs27 » notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general chevrontexaco manages investments provides administrative financial management support us foreign subsidiaries affiliates engage fully integrated petroleum operations chemicals operations coal mining activities addition chevrontexaco holds investments power generation gasification businesses collectively companies operate 180 countries petroleum operations consist exploring developing producing crude oil natural gas refining crude oil finished petroleum products marketing crude oil natural gas many products derived petroleum transporting crude oil natural gas petroleum products pipelines marine vessels motor equipment rail car chemicals operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lube oil additives preparing consolidated financial statements company follows accounting principles generally accepted united states america requires use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percent owned investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income deferred income taxes provided gains losses investments assessed possible impairment indications fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments common stock equity investees changed subsequent recov eries fair value subsequent recoveries carrying value investments reported “other comprehensive income” differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity commodity derivative instruments intended manage price risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company elected apply hedge accounting changes fair value contracts reflected current income company’s trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income shortterm investments shortterm investments classified available sale highly liquid debt equity securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” shortterm investments markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used oil gas exploration production activities costs development wells related plant equipment proved mineral interests oil gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending one following 1 decisions additional major capital expenditures 2 results additional exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed deter fs28 note 1 summary significant accounting policies continued mination whether proved reserves found cannot made within one year following completion drilling exploratory wells costs expensed longlived assets held used including proved oil gas properties assessed possible impairment comparing carrying values undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset expectation likely longlived asset group sold otherwise disposed significantly end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved oil gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession field basis appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value fair value less cost sell net book value exceeds sales value asset considered impaired resulting adjustment lower value effective january 1 2003 company implemented financial accounting standards board statement 143 “accounting asset retirement obligations” fas 143 fair value liability asset retirement obligation recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated see also note 25 page fs50 relating asset retirement obligations includes additional information company’s adoption fas 143 previously oil gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end property’s useful life depreciation depletion capitalized costs proved oil gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments andor cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required oil gas coal producing properties liability asset retirement obligation made following fas 143 company implemented effective january 1 2003 see note 25 page fs50 related fas 143 superfund sites company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares company records gross amount liability based best estimate future costs using currently available technology applying current regulations well company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevrontexaco interest producers generally recognized basis company’s net working interest entitlement method stock compensation december 31 2003 company stockbased employee compensation plans described fully note 22 beginning page fs46 company accounts plans recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations following table illustrates effect net income earnings per share company applied fairvaluerecognition provisions financial accounting standards board fasb statement 123 “accounting stockbased compensation” stockbased employee compensation fs29 » notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies continued amounts 2003 include benefit 016 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly company’s retained earnings included net income period basis presentation merger chevron texaco october 9 2001 texaco inc texaco became wholly owned subsidiary chevron corporation chevron pursuant merger transaction chevron changed name chevrontexaco corporation chevrontexaco combination accounted pooling interests consolidated financial statements give retroactive effect merger periods presented chevron texaco always combined certain reclassifications made conform separate presentations chevron texaco reclassifications impact amount net income stockholders’ equity consolidated financial statements include accounts majorityowned controlled subsidiaries elimination significant intercompany accounts transactions included consolidation accounts caltex group companies caltex joint venture owned 50 percent chevron texaco prior merger accounted equity method companies note 2 texaco merger transaction extraordinary item following table presents summarized financial data combined company period prior merger includes certain reclassification adjustments conform historical chevron presentation consolidation former equity operations intercompany eliminations loss associated sales company’s interests equilon motiva time merger share texaco common stock converted taxfree basis right receive 077 shares chevrontexaco common stock approximately 425 million additional shares common stock issued representing 40 percent outstanding chevrontexaco common stock merger condition approving merger us federal trade commission ftc required divestment certain texaco assets texaco’s investments us refining marketing transportation affiliates equilon enterprises llc equilon motiva enterprises llc motiva well interests us natural gas processing transportation facilities general aviation fuel marketing time merger texaco placed interests equilon motiva trust required ftc company longer exercised significant influence investments associated accounting method changed equity cost basis net income 2001 included loss 643 net tax benefit 144 061 per common share diluted related disposition assets required condition ftc approval merger assets made duplicative merger assets sold result merger provided net income approximately 375 2001 aftertax loss dispositions reported extraordinary item accordance poolingofinterests accounting requirements included total aftertax loss 564 connected sale interests equilon motiva proceeds sale closed february 2002 approximately 2200 note 3 special items financial information net income period presented includes amounts categorized company “special items” management separately identifies assist identification explanation trend results listed following table categories items net decrease increase net income related tax effects fs30 note 3 special items financial information continued 2003 company recorded impairments 103 30 respectively various us international oil gas producing properties reflecting lower expected recovery proved reserves writedown market value assets anticipation sale impairments 123 downstream assets conversion refinery products terminal writedown market value assets anticipation sale also 2003 chevrontexaco exchanged dynegy series b preferred stock cash notes series c preferred stock 365 difference fair value items company’s carrying value included net income 2002 company recorded writedowns 1626 investment dynegy common preferred stock 136 investment publicly traded caltex australia affiliate respective estimated fair values writedowns required declines fair values investments carrying values deemed temporary refer note 14 pages fs38 fs39 additional information company’s investment dynegy caltex australia also 2002 impairments 183 recorded various us exploration production properties 100 international projects impairments 2001 included 1022 midway sunset field california result writedown proved oil reserve quantities upon determination lowerthanprojected oil recovery field’s steam injection process 247 impairment ll652 field venezuela also recorded 2001 slowerthanexpected reservoir repressurization resulted reduction projected volumes oil recoverable company’s remaining contract period operation impairments included “asset writeoffs revaluations” assets held use aggregate effects income statement categories special items reflected following table including chevrontexaco’s proportionate share special items related equity affiliates financial information follows excess market value carrying value inventories lifo method used 2106 1571 1580 december 31 2003 2002 2001 respectively market value generally based average acquisition costs year lifo profits 82 13 10 included net income years 2003 2002 2001 respectively fs31 » notes consolidated financial statements millions dollars except pershare amounts note 4 information relating consolidated statement cash flows “net decrease operating working capital” composed following 2003 “net cash provided operating activities” includes 890 “decrease deferred charges” decrease amount “other” related balance sheet reclassifications certain pensionrelated assets liabilities accordance requirements fas 87 “employers’ accounting pensions” major components “capital expenditures” reconciliation amount capital exploratory expenditures excluding equity affiliates presented management’s discussion analysis financial condition results operations mda detailed following table note 5 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevrontexaco corporation cusa subsidiaries manage operate chevrontexaco’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum natural gas liquids excluding regulated pipeline operations chevrontexaco cusa also holds chevrontexaco’s investments cpchem joint venture dynegy accounted using equity method 2002 2003 chevrontexaco implemented legal reorganizations certain chevrontexaco subsidiaries transferred assets cusa chevrontexaco companies merged cusa summarized financial information cusa consolidated subsidiaries presented table gives retroactive effect reorganization manner similar pooling interests periods presented companies always combined reorganization occurred january 1 2001 however financial information included may reflect financial position operating results future historical results periods presented reorganization actually occurred january 1 2001 fs32 note 5 summarized financial data chevron usa inc continued cusa’s net loss 1895 2002 included net charges 2555 asset writedowns dispositions 2306 related dynegy note 6 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevrontexaco corporation ctc principal operator chevrontexaco’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevrontexaco companies chevrontexaco corporation guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented follows 2003 ctc’s paidin capital increased 6 additional capital contributions settlements restrictions ctc’s ability pay dividends make loans advances december 31 2003 note 7 stockholders’ equity retained earnings december 31 2003 2002 included approximately 1300 1600 respectively company’s share undistributed earnings equity affiliates upon merger chevron texaco authorized common stock chevrontexaco increased 2 billion shares 075 par value 4 billion shares 075 par value terms merger agreement approximately 425 million shares chevrontexaco common stock issued exchange outstanding shares texaco common stock based upon exchange ratio 077 chevrontexaco share texaco share texaco’s common stock held treasury canceled effective time merger 1998 connection renewal chevron’s stockholder rights plan chevron declared dividend distribution outstanding share common stock one right purchase participating preferred stock rights issued plan became exercisable unless redeemed earlier chevrontexaco person group commenced tender exchange offer acquired obtained right acquire 10 percent outstanding shares common stock without prior consent chevrontexaco october 2002 stockholder rights agreement amended rights would expire november 2003 five years earlier initial expiration date november 2008 event made rights exercisable prior expiration november 2003 june 2001 1200 shares texaco cumulative variable rate preferred stock called market auction preferred shares maps outstanding aggregate value 300 maps redeemed june 2001 liquidation preference 250000 per share plus premium accrued unpaid dividends december 31 2003 30 million shares chevrontexaco’s authorized unissued common stock reserved issuance chevrontexaco corporation longterm incentive plan ltip approved stockholders 1990 end 2003 plan’s common stock requirements met company’s treasury stock issuances reserved shares note 8 financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related price volatility crude oil refined products natural gas refinery feedstock company uses derivative commodity instruments manage exposure small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids company also uses derivative commodity instruments limited trading purposes company maintains policy requiring international swaps derivatives association agreement govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transaction bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty “net” marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk company’s policy use netting agreements certain counterparties conducts significant transactions fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fs33 » notes consolidated financial statements millions dollars except pershare amounts note 8 financial derivative instruments continued fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income 2003 new swaps initiated yearend 2003 interest rate swaps outstanding related fixedrate debt weighted average maturity approximately 46 years fair values interest rate swaps reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported directly income part “interest debt expense” activities reported “operating activities” consolidated statement cash flows fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 7229 7296 estimated fair values 7709 7971 december 31 2003 2002 respectively interest rate swaps notional principal amounts 665 estimated fair values 65 70 december 31 2003 2002 respectively company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 3803 2506 december 31 2003 2002 respectively balances 2803 1682 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately 35 years concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient letters credit principal security obtained support lines credit investment dynegy notes preferred stock beginning 2003 company held 1500 aggregate principal amount dynegy series b preferred stock due redemption par value november 2003 august company exchanged preferred stock 225 cash 225 face value dynegy junior unsecured subordinated notes due 2016 400 face value dynegy series c convertible preferred stock stated maturity 2033 company recorded junior notes series c preferred stock date exchange fair values 170 270 respectively total 440 together 225 cash total amount recorded date exchange 665 gain 365 included net income date difference 665 fair value received net balance sheet amount 300 associated series b shares december 31 2003 estimated fair values junior notes series c shares totaled 530 90 difference 440 recorded august recorded “investments advances” offsetting amount “other comprehensive income” future temporary changes estimated fair values new securities likewise reported “other comprehensive income” however future decline fair value deemed temporary charge income period would recorded interest accrues notes dividends payable preferred stock recognized income period note 9 operating segments geographic data chevrontexaco separately manages exploration production refining marketing transportation chemicals businesses “all other” activities include company’s investment dynegy coal mining operations power gasification businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies expenses net losses associated chevron texaco merger company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs mergerrelated items remain corporate level included net income 2003 net charges 196 cumulative effect accounting principle changes primarily relating new accounting standard recognizing asset retirement obligations net amount composed fs34 note 9 operating segments geographic data continued 350 charges us exploration production credits 145 9 international exploration production respectively aftertax segment income loss presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2003 2002 follow segment sales operating revenues operating segment sales operating revenues including internal transfers years 2003 2002 2001 presented following table sales transfer products segments prices approximate market prices revenues exploration production segment derived primarily production crude oil natural gas well sale thirdparty production natural gas revenues refining marketing transportation segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products chemicals segment revenues derived manufacture sale lube oil fuel additives revenues “all other” activities include coal mining operations power gasification businesses insurance operations real estate activities technology companies united states country chevrontexaco generates significant revenues united kingdom revenues amounted 12121 10816 10350 2003 2002 2001 respectively fs35 » notes consolidated financial statements millions dollars except pershare amounts note 9 operating segments geographic data continued segment income taxes segment income tax expenses years 2003 2002 2001 follows segment information additional information segmentation major equity affiliates contained note 14 beginning page fs38 information related properties plant equipment segment contained note 15 page fs40 note 10 litigation unocal patent chevron texaco four oil companies refiners filed suit 1995 contesting validity patent ‘393’ patent granted unocal corporation unocal certain reformulated gasoline blends chevrontexaco sells reformulated gasolines california certain months year march 2000 us court appeals federal circuit upheld september 1998 district court decision unocal’s patent valid enforceable assessed damages 575 cents per gallon gasoline produced summer 1996 infringed claims patent february 2001 us supreme court concluded would review lower court’s ruling case sent back district court accounting infringing gasoline produced august 1 1996 district court ruled pergallon damages awarded jury limited infringement occurs california additionally us patent trademark office uspto granted three petitions refiners reexamine validity unocal’s ‘393’ patent twice rejected claims ‘393’ patent rejections appealed unocal uspto board appeals district court judge requested briefing advised would enter final judgment case uspto completed reexamination ‘393’ patent 2002 2003 uspto granted two petitions reexamination another unocal patent ‘126’ patent uspto rejected validity claims ‘126’ patent could affect larger share us gasoline production separately march 2003 federal trade commission ftc fs36 note 10 litigation continued filed complaint unocal alleging conduct pendency patents violation antitrust law november 2003 administrative law judge dismissed complaint brought ftc appealed decision unocal obtained additional patents could affect larger share us gasoline production chevrontexaco believes additional patents invalid unenforceable andor infringed company’s financial exposure event unfavorable conclusions patent litigation regulatory reviews may include royalties plus interest production gasoline proved infringed patents competitive financial effects company’s refining marketing operations although presently indeterminable could material chevrontexaco accruing normal course business future estimated liability potential infringement ‘393’ patent covered 1998 trial court’s ruling 2000 prior merger chevron texaco made payments unocal totaling approximately 30 million original court ruling including interest fees mtbe another issue involving company petroleum industry’s use methyl tertiary butyl ether mtbe gasoline additive potential environmental impact seepage groundwater along oil companies company party 60 lawsuits claims related use chemical mtbe certain oxygenated gasolines actions may require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period chevrontexaco reduced use mtbe gasoline manufactures united states including complete phaseout mtbe california end 2003 note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2003 2002 2001 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging one 25 years andor options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2003 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 12 restructuring reorganization costs connection various reorganizations restructurings across several businesses corporate departments 2003 company recorded beforetax charges 258 146 tax estimated termination benefits approximately 4500 employees nearly half liability related global downstream business including effect reorganization along functional lines rather geographic configuration used previously substantially employee reductions expected occur early 2005 activity company’s liability related reorganizations restructurings 2003 summarized following table approximate 100 liability remained employee severance charges recorded 2002 2001 balance related primarily deferred payment options elected certain employees terminated end 2003 paid january 2004 fs37 » notes consolidated financial statements millions dollars except pershare amounts note 13 assets held sale december 31 2003 company classified 1100 net properties plant equipment “assets held sale” consolidated balance sheet asset dispositions expected occur 2004 substantially related us upstream business segment anticipated sales consisting interests several hundred individual properties relate company’s plan dispose certain assets overall portfolio provide sufficient longterm value significant gains losses recorded 2003 heldforsale assets revenues earnings associated assets likewise insignificant 2003 earlier years note 14 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost follows placed trust time merger accounting changed equity method cost basis descriptions major affiliates follows tengizchevroil chevrontexaco 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period upon formation joint venture company incurred obligation 420 payable republic kazakhstan upon attainment dedicated export system capability greater 260000 barrels oil per day tco’s production capacity part 2001 transaction company paid 210 420 obligation additional 210 paid 2003 settle remaining obligation 420 also included carrying value original investment company believed beyond reasonable doubt full payment would made equilon enterprises llc motiva enterprises llc february 2002 company equity interests equilon motiva joint ventures engaged us refining marketing activities mandate ftc condition merger company’s ownership interests placed trust october 9 2001 trust completed dispositions company’s investments equilon motiva february 2002 see note 2 page fs30 additional information equilon motiva lgcaltex oil corporation chevrontexaco owns 50 percent lgcaltex joint venture formed 1967 lg group caltex engage importing refining marketing petroleum products petrochemicals south korea star petroleum refining company ltd chevrontexaco 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery map ta phut thailand petroleum authority thailand owns remaining 36 percent sprc caltex australia ltd chevrontexaco 50 percent equity ownership interest caltex australia limited cal remaining 50 percent cal publicly owned 2002 company wrote investment cal 136 estimated fair value september 30 2002 december 31 2003 fair value chevrontexaco’s share cal common stock 465 aggregate carrying value company’s investment cal approximately 90 lower amount underlying equity cal net assets chevron phillips chemical company llc chevrontexaco owns 50 percent cpchem formed july 2000 chevron merged petrochemicals businesses phillips petroleum company cpchem limited liability company chevrontexaco records provision income taxes related tax liability applicable share venture’s income separately consolidated financial statements december 31 2003 company’s carrying value investment cpchem approximately 130 lower amount underlying equity cpchem’s net assets dynegy inc chevrontexaco owns approximate 26 percent equity interest common stock dynegy energy merchant engaged power generation natural gas liquids processing marketing regulated energy delivery company also holds investments dynegy notes preferred stock fs38 note 14 investments advances continued investment dynegy common stock december 31 2003 carrying value company’s investment dynegy common stock approximately 150 amount 425 company’s proportionate interest dynegy’s underlying net assets difference resulted writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary approximate 425 difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors giving rise decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly reflect difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2003 415 investments dynegy notes preferred stock refer note 8 page fs34 discussion investments information “sales operating revenues” consolidated statement income includes 6308 6522 15238 affiliated companies 2003 2002 2001 respectively “purchased crude oil products” includes 1740 1839 4069 affiliated companies 2003 2002 2001 respectively “accounts notes receivable” consolidated balance sheet includes 827 615 due affiliated companies december 31 2003 2002 respectively “accounts payable” includes 118 161 due affiliated companies december 31 2003 2002 respectively following table provides summarized financial information 100 percent basis equilon motiva equity affiliates well chevrontexaco’s total share accounted equity method premerger cost basis postmerger company’s share income underlying equity net assets investments includes effects writedowns certain investments largely related dynegy inc caltex australia ltd described preceding section 2002 conformed 2003 presentation fs39 » notes consolidated financial statements millions dollars except pershare amounts note 15 properties plant equipment1 refer note 25 page fs50 discussion effect 2003 ppe balances depreciation expenses related adoption fas 143 “accounting asset retirement obligations” net accumulated abandonment restoration costs 2263 2155 december 31 2002 2001 respectively net dry hole expense related prior years’ expenditures 124 36 228 2003 2002 2001 respectively primarily coal real estate assets management information systems note 16 taxes 2003 beforetax income including related corporate charges us operations 5701 compared beforetax loss 2140 2002 beforetax income 1778 2001 international operations beforetax income 7069 6296 6513 2003 2002 2001 respectively us federal income tax expense reduced 196 208 202 2003 2002 2001 respectively business tax credits preceding table include us deferred tax benefit 191 foreign deferred tax expense 170 associ ated adoption fas 143 related cumulative effect change accounting principle table also include current us tax benefit 2 us deferred tax benefit 142 associated extraordinary item 2001 company’s effective income tax rate varied us statutory federal income tax rate following fs40 note 16 taxes continued 2003 effective tax rate 42 percent decrease effective tax rate 2003 compared 2002 resulted lower proportion international taxable income taxed higher rates us taxable income absence 2003 2002 tax effects capital losses discussed next paragraph increase 2002 effective tax rate 2001 due number factors one reason us beforetax income generally subject lower tax rate significantly smaller percentage overall beforetax income 2002 another major factor impairment investments dynegy caltex australia capital losses offsetting capital gains available company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences benefit expected realized decrease valuation allowance relates primarily expiration foreign tax credits release valuation allowance certain net operating losses management believes realized tax loss carryforwards exist many foreign jurisdictions expire various times beginning 2004 2010 however tax loss carryforwards expiration date december 31 2003 2002 deferred taxes classified consolidated balance sheet follows company’s policy subsidiaries included us consolidated tax return record income tax expense though filed separately parent recording adjustment income tax expense effects consolidation income taxes accrued retained earnings international subsidiaries corporate joint ventures intended remitted income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 10541 december 31 2003 substantially amount represents earnings reinvested part company’s ongoing business practicable estimate amount taxes might payable eventual remittance earnings remittance certain countries impose withholding taxes subject certain limitations available use tax credits us tax liability taxes income follows note 17 shortterm debt fs41 » notes consolidated financial statements millions dollars except pershare amounts note 17 shortterm debt continued redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 8 beginning page fs33 information concerning company’s debtrelated derivative activities december 31 2003 company 4285 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate bank prime rate amounts outstanding credit agreements 2003 yearend december 31 2003 2002 company classified 4285 4110 respectively shortterm debt longterm settlement obligations expected require use working capital 2004 company intent ability refinance debt longterm basis note 18 longterm debt chevrontexaco three “shelf” registrations file securities exchange commission together would permit issuance 3800 debt securities pursuant rule 415 securities act 1933 company’s longterm debt outstanding yearend 2003 2002 follows guarantee esop debt assumed esop 1999 less 150 individually weightedaverage interest rates december 31 2003 consolidated longterm debt maturing december 31 2003 follows 2004 863 2005 572 2006 326 2007 2209 2008 1044 2008 2215 february 2003 company redeemed 200 texaco capital inc bonds originally due 2033 also february company issued 750 3375 percent bonds due february 2008 shelf registration proceeds issuance used pay commercial paper borrowings note 19 new accounting standards january 2003 financial accounting standards board fasb issued interpretation 46 “consolidation variable interest entities” fin 46 fin 46 amended arb 51 “consolidated financial statements” established standards determining circumstances variable interest entity vie consolidated primary beneficiary fin 46 also requires disclosures vies company required consolidate significant variable interest december 17 2003 fasb issued fin 46r included amendments fin 46 also required application interpretation affected entities later march 31 2004 calendaryear reporting companies however companies must applied interpretation specialpurpose entities december 31 2003 adoption fin 46r relates specialpurpose entities material impact company’s results operations financial position liquidity company expect material impact upon full adoption interpretation march 31 2004 note 20 accounting mineral interests investment securities exchange commission sec questioned certain public companies oil gas mining industries proper accounting reporting acquired contractual mineral interests fasb statement 141 “business combinations” fas 141 fasb statement 142 “goodwill intangible assets” fas 142 accounting standards became effective company july 1 2001 january 1 2002 respectively issue whether mineral interest costs classified balance sheet part “properties plant equipment” “intangible assets” company continue classify costs “properties plant equipment” apportion expense future periods company’s existing accounting policy authoritative guidance provided chevrontexaco net book values category mineral interest investment december 31 2003 2002 38 billion 41 billion respectively reclassification balances becomes necessary company’s statements income cash flows would affected however additional disclosures related intangible assets would required prescribed associated accounting standards note 21 employee benefit plans company defined benefit pension plans many employees provides certain health care life insurance plans active qualifying retired employees company typically funds defined benefit plans legal funding required united states includes qualified taxexempt plans subject employee retirement income security act erisa minimum funding standard company fs42 note 21 employee benefit plans continued typically fund domestic nonqualified taxexempt pension plans international pension plans subject legal funding requirements contributions pension plans may less tax efficient investment returns may less attractive company’s investment alternatives company’s annual contributions medical dental benefits limited lesser actual medical dental claims defined fixed percapita amount life insurance benefits paid company annual contributions based actual plan experience company uses measurement date december 31 value pension postretirement benefit plan obligations december 2003 medicare prescription drug improvement modernization act 2003 act became law act introduces prescription drug benefit medicare part well federal subsidy sponsors retiree health care benefit plans company provide benefit least actuarially equivalent medicare part company currently evaluating impact legislation benefit plan design accounting company elected accordance fasb staff position fas 1061 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” defer recognition act company’s measurement accumulated postretirement benefit obligation net postretirement benefit cost financial statements accompanying notes specific accounting guidance federal subsidy pending issued could require company change previously reported information status company’s pension postretirement benefit plans 2003 2002 follows amounts 2002 conformed 2003 presentation include company contributions benefits paid nonqualified plans “accumulated comprehensive income” includes deferred income taxes 415 47 2003 us international respectively 467 4 2002 us international respectively item presented net taxes consolidated statement stockholders’ equity company recorded additional minimum pension liabilities 1533 152 2003 us international respectively 20 2002 us 1695 international respectively reflect amount unfunded accumulated benefit obligations additional minimum pension liabilities offset intangible assets charge “accumulated comprehensive income ” accrued liabilities also reflect net minimum liabilities plans prepaid benefit costs additional minimum liabilities fs43 » notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued accumulated benefit obligations us pension plans pension plans outside us 5374 2372 respectively december 31 2003 4945 1740 respectively december 31 2002 information pension plans accumulated benefit obligation excess plan assets december 31 2003 2002 components net periodic benefit cost 2003 2002 2001 discount rate expected rate return plan assets updated quarterly main us pension plan company employs rigorous process determine estimates longterm rate return pension assets estimates primarily driven actual historical assetclass returns advice external actuarial firms incorporating specific assetclass risk factors asset allocations regularly updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies december 31 2003 estimated longterm rate return us pension plan assets account 70 percent company’s pension plan assets 78 percent compared rates 78 90 percent end 2002 2001 respectively yearend marketrelated value us pension plan assets used determination pension expense based market values preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility yet still contemporaneous end year asset allocation company’s primary us pension plans end 2003 2002 target allocation asset category us pension plans invest primarily asset categories sufficient size liquidity cost efficiency permit investments reasonable size us pension plans invest asset categories provide diversification benefits easily measured maximum minimum holding ranges asset categories set chevrontexaco board directors primary us pension plan actual asset allocation within approved ranges based variety economic market conditions consideration specific asset category risk assess plan’s investment performance longterm asset allocation policy benchmark established equities include investments company’s common stock amount 6 4 december 31 2003 2002 respectively “other” asset category includes minimal investments private equity limited partnerships early 2004 company contributed 535 us plans additionally company anticipates contributing fs44 note 21 employee benefit plans continued 50 us plans remainder year 2003 contributions us plans totaled 1203 years subsequent 2004 company expects contributions approximately 250 per year equal cost benefits earned year contributions 2004 international pension plans estimated 200 2003 contributions 214 actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors company anticipates funding us postretirement benefits 210 2004 compared 197 2003 postretirement benefit measurement purposes 2003 health care costs assumed increase approximately 84 percent previous year trend rates gradually drop 45 percent 2007 beyond assumed health care costtrend rates significant effect amounts reported retiree health care costs onepercentagepoint change assumed health care costtrend rates would following effects employee savings investment plan eligible employees chevrontexaco certain subsidiaries participate chevrontexaco employee savings investment plan esip 2002 employees thrift plan texaco inc employees savings plan chevrontexaco global energy inc formerly caltex corporation stock plan chevrontexaco global energy inc employees thrift plan fuel marine marketing llc merged chevrontexaco esip charges expense plans 160 161 157 2003 2002 2001 respectively employee stock ownership plans esop within chevrontexaco employee savings investment plan company established employee stock ownership plan 1989 chevron established leveraged employee stock ownership plan lesop constituent part esop lesop provides partial prefunding company’s future commitments esip result annual income tax savings company 1988 texaco established leveraged employee stock ownership plan component employees thrift plan texaco inc 2002 employees thrift plan texaco inc subsumed chevrontexaco esip permitted american institute certified public accountants aicpa statement position 936 “employers’ accounting employee stock ownership plans” company elected continue practices based statement position 763 “accounting practices certain employee stock ownership plans” subsequent consensus emerging issues task force financial accounting standards board debt lesops recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received lesops interest incurred lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations expense recorded lesops 24 98 75 2003 2002 2001 respectively including 28 32 43 interest expense related lesop debt dividends paid lesop shares held used service lesop debt dividends used 61 49 86 2003 2002 2001 respectively company made lesop contributions 26 102 75 2003 2002 2001 respectively satisfy lesop debt service excess dividends received lesop shares pledged collateral debt shares released suspense account allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service credit charge compensation expense 4 66 32 2003 2002 2001 respectively lesop shares december 31 2003 2002 follows 2002 restated conform 2003 presentation benefit plan trust texaco established benefit plan trust funding obligations benefit plans yearend 2003 trust contained 71 million shares chevrontexaco treasury stock company intends continue pay obligations benefit plans trust sell shares use dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations management incentive plans chevrontexaco two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility plans expanded 2002 include former employees texaco caltex mip annual cash incentive plan links awards performance results prior year cash awards may deferred conversion stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants texaco also cash incentive program stock incentive plan sip included stock options restricted stock incentive awards executives directors key employees awards caltex ltip form performance units stock appreciation rights charges fs45 » notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued expense combined management incentive plans excluding expense related ltip sip stock options restricted stock awards discussed note 22 148 48 101 2003 2002 2001 respectively incentive plans company program provides eligible employees annual cash bonus company achieves certain financial safety goals charges program 151 158 154 2003 2002 2001 respectively note 22 stock options company applies apb opinion 25 related interpretations accounting stockbased compensation programs described stockbased compensation expense credit recognized connection programs 2 111 2003 2002 2001 respectively refer note 1 page fs30 pro forma effect net income earnings per share company applied fairvaluerecognition provisions fas 123 broadbased employee stock options 1998 chevron granted eligible employees option varied 100 300 shares stock equivalents dependent employee’s salary job grade options vested two years february 2000 options 4820800 shares awarded exercise price 763125 per share outstanding option shares 2366311 end 2001 2002 exercises 295985 forfeitures 61151 reduced outstanding option shares 2009175 end year 2003 exercises 11630 forfeitures 61050 reduced outstanding option shares 1936495 end year options expire february 2008 company recorded expense credit 2 1 options 2003 2002 2001 respectively fair value option share date grant fas 123 estimated 1908 using average results blackscholes models preceding 10 years 10year averages assumption used blackscholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent longterm incentive plan stock options granted ltip extend 10 years date grant effective options granted june 2002 one third options vest first second third anniversaries date grant prior change options granted chevron vested one year date grant whereas options granted texaco sip vested twoyear period rate 50 percent year maximum number shares may granted year 1 percent total outstanding shares common stock january 1 year closing merger october 2001 outstanding options granted texaco sip converted chevrontexaco options merger exchange rate 077 options retained provision restored options feature enables participant exercises stock option exchanging previously acquired common stock shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price fair market value common stock day restored option granted restricted shares granted former texaco plan contained performance element satisfied order specified portion shares vest upon merger restricted shares became vested converted chevrontexaco shares merger exchange ratio 077 apart restored options awards may granted former texaco plans amount plans charged compensation expense 2003 2002 110 expense recorded 2001 restricted performance shares granted sip 2001 totaled 392000 average fair value 9105 per share fair market value stock option granted estimated date grant fas 123 using blackscholes optionpricing model following weightedaverage assumptions blackscholes weightedaverage fair value chevrontexaco options granted 2003 2002 2001 1102 1859 2045 per share respectively weightedaverage fair value sip restored options granted 2003 2002 texaco options granted 2001 806 1029 1290 per share summary status stock options awarded company’s ltip well former texaco plans 2003 2002 2001 follows fs46 note 22 stock options continued following table summarizes information stock options outstanding including former texaco plans december 31 2003 note 23 contingencies commitments income taxes company estimates income tax expense liabilities annually liabilities generally finalized individual taxing authorities several years end annual period income taxes estimated us federal income tax liabilities settled 1996 chevrontexaco formerly chevron 1993 chevrontexaco global energy inc formerly caltex 1991 texaco california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees december 31 2003 company subsidiaries provided guarantees either directly indirectly 917 notes contractual obligations affiliated companies 256 third parties discussed major category amounts carried liabilities company’s obligations guarantees 917 guarantees provided affiliates 716 related borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects approximately 75 percent amounts guaranteed expire 2004 remaining guarantees expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees another 201 affiliate guarantees related obligations connection pricing power purchase agreements certain company’s cogeneration affiliates terms guarantees company may required make payments certain conditions affiliates perform agreements provisions recourse third parties assets held collateral pricing guarantees 256 provided third parties including approximately 110 construction loans host governments company’s international upstream operations 146 provided principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities 75 percent total amounts guaranteed expire 2004 remainder expiring 2004 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 100 guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets december 31 2003 chevrontexaco outstanding guarantees approximately 238 equilon debt leases following february 2002 disposition interest equilon company received indemnification shell oil company claims arising guarantees company recorded liability guarantees approximately 50 percent amounts guaranteed expire within 20042008 period guarantees remaining amounts expiring 2019 indemnities company also provided certain indemnities contingent liabilities equilon motiva shell oil company shell saudi refining inc connection february 2002 sale company’s interests investments indemnities cover general contingent liabilities including associated unocal patent litigation company would required perform indemnified liabilities become actual losses could required make maximum future payments 300 company paid approximately 28 contingencies disputed approximately 34 claims submitted shell indemnities shell requested arbitration dispute expected occur mid2004 recourse provisions enabling recovery amounts third parties assets held collateral within five years february 2002 sale buyer’s option company also may required purchase certain assets shell net book value determined time company’s purchase assets consist 12 separate lubricant facilities two tendered purchased company late 2003 de minimis price company also provided certain indemnities pertaining contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods chevrontexaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon must asserted later february 2009 claims relating motiva must asserted later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company holds assets collateral made payments indemnities fs47 » notes consolidated financial statements millions dollars except pershare amounts note 23 contingencies commitments continued amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 specific incident securitization company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2003 approximately 1000 representing 11 percent chevrontexaco’s total current accounts receivables balance securitized chevrontexaco’s total estimated financial exposure arrangements december 31 2003 approximately 75 arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experiencing major defaults collection receivables chevrontexaco believes would loss exposure connected thirdparty investments securitization arrangements longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate amounts required payments various commitments 2004 1200 2005 1100 2006 1000 2007 1000 2008 1000 2009 1900 total payments agreements 1400 2003 1200 2002 1500 2001 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2004 700 2005 800 2006 800 2007 800 2008 800 2009 800 minority interests company commitments related preferred shares subsidiary companies accounted minority interest texaco capital llc wholly owned finance subsidiary issued 65 deferred preferred shares series c dividends amounting 60 series c rate 717 percent compounded annually paid redemption date february 2005 unless earlier redemption occurs early redemption may result upon occurrence certain specific events mvp production inc subsidiary redeemed variable rate cumulative preferred shares 75 owned one minority holder 2003 environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited superfund sites refineries oil fields service stations terminals land development areas whether operating closed sold amount future cost indeterminable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemicals concerns global operations chevrontexaco affiliates operations 180 countries areas company affiliates major operations include united states canada australia united kingdom norway denmark france partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad equatorial guinea democratic republic congo south africa indonesia philippines singapore china thailand venezuela argentina brazil colombia trinidad tobago south korea company’s caspian pipeline consortium cpc affiliate operates russia kazakhstan company’s tengizchevroil affiliate operates kazakhstan company’s chevron phillips chemical company llc affiliate manufactures markets wide range petrochemicals worldwide basis manufacturing facilities united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken host governments increase public ownership company’s partially wholly owned businesses andor impose additional taxes royalties company’s operations certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated oil gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones fs48 note 23 contingencies commitments continued naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability approximately 200 time possible maximum net amount could owed chevrontexaco estimated 50 timing settlement exact amount within range estimates uncertain contingencies chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 24 earnings per share basic earnings per share eps based upon net income less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevrontexaco stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs see note 22 “stock options” pages fs46 fs47 following table sets forth computation basic diluted eps 1 2003 amount company’s share capital stock transaction dynegy affiliate applicable accounting rules recorded directly retained earnings 2 see note 2 page fs30 explanation extraordinary item 3 includes net loss 200 adoption fas 143 gain 4 company’s share dynegy’s cumulative effect adoption eitf 023 fs49 » notes consolidated financial statements millions dollars except pershare amounts note 25 fas 143 asset retirement obligations company adopted financial accounting standards board statement 143 “accounting asset retirement obligations” fas 143 effective january 1 2003 accounting standard applies fair value liability asset retirement obligation recorded legal obligation associated retirement tangible longlived asset liability reasonably estimated obligations associated retirement assets require recognition certain circumstances 1 present value liability offsetting asset retirement obligation aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates fas 143 primarily affects company’s accounting oil gas producing assets differs several respects previous accounting fas 19 “financial accounting reporting oil gas producing companies” first quarter 2003 company recorded net aftertax charge 200 cumulative effect adoption fas 143 including company’s share amounts attributable equity affiliates cumulativeeffect adjustment also increased following balance sheet categories “properties plant equipment” 2568 “accrued liabilities” 115 “deferred credits noncurrent obligations” 2674 “noncurrent deferred income taxes” decreased 21 upon adoption significant legal obligations retire refining marketing transportation downstream chemical longlived assets generally recognized indeterminate settlement dates asset retirements prevented estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation cumulativeeffect net charge effect new accounting standard net income 2003 materially different result would fas 19 accounting included “depreciation depletion amortization” 52 related depreciation aro asset 132 related accretion aro liability following table illustrates company’s net income extraordinary items net income related per share amounts would provisions fas 143 applied retroactively amount excludes cumulativeeffect charge 200 018 per basic diluted share adoption fas 143 includes benefit 5 2 2002 2001 respectively represent reversal fas 19 depreciation related abandonment offset partially proforma expenses depreciation accretion aro asset liability net tax de minimis effect net income per basic diluted share reported net income extraordinary items 107 per basic diluted share 2002 371 per basic share 370 diluted 2001 reported net income 107 per basic diluted share 2002 310 per basic share 309 diluted 2001 prior implementation fas 143 company recorded provision abandonment part “accumulated depreciation depletion amortization” upon implementation fas 143 provision abandonment reversed aro liability recorded amount abandonment reserve end year proforma aro liability follows following table indicates changes company’s beforetax asset retirement obligations 2003 fs50 » quarterly results stock market data unaudited includes benefit 016 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly retained earnings included net income period company’s common stock listed new york stock exchange trading symbol cvx pacific exchange february 25 2004 stockholders record numbered approximately 239000 october 9 2001 common stock traded name chevron corporation trading symbol chv restrictions company’s ability pay dividends fs51 » fiveyear financial summary amount 2003 includes benefit 016 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly retained earnings included net income period chevron corporation dividend premerger » supplemental information oil gas producing activities unaudited accordance statement financial accounting standards 69 “disclosures oil gas producing activities” fas 69 section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo asiapacific geographic area includes activities principally australia china indonesia kazakhstan partitioned neutral zone kuwait saudi fs52 supplemental information oil gas producing activities continued arabia papua new guinea philippines thailand “other” geographic category includes activities united kingdom canada denmark netherlands norway trinidad tobago colombia venezuela brazil argentina countries amounts shown affiliated companies chevrontexaco’s 50 percent equity share tengizchevroil tco exploration production partnership operating republic kazakhstan 30 percent equity share hamaca exploration production partnership operating venezuela company increased ownership tco 45 percent 50 percent january 2001 amounts tables exclude cumulative effect adjustment adoption fas 143 “asset retirement obligations” refer note 25 page fs50 table costs incurred exploration property acquisitions development1 includes costs incurred whether capitalized expensed excludes general support equipment expenditures see note 25 fas 143 “asset retirement obligations” page fs50 includes acquisition costs additional 5 percent interest 2001 includes wells equipment facilities associated proved reserves include properties acquired property exchanges fs53 » supplemental information oil gas producing activities continued unaudited table ii capitalized costs related oil gas producing activities1 includes assets held sale see note 25 fas 143 “asset retirement obligations” page fs50 fs54 table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2003 2002 2001 shown following table net income exploration production activities reported pages fs6 fs7 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts pages fs6 fs7 value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations see note 25 page fs50 fas 143 “asset retirement obligations” includes net sulfur income foreign currency transaction gains losses certain significant impairment writedowns miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified management’s discussion analysis pages fs6 fs7 2002 2001 include certain reclassifications conform 2003 presentation fs55 » supplemental information oil gas producing activities continued unaudited table iv results operations oil gas producing activities unit prices costs12 value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel conformed 2003 presentation exclude taxes table v reserve quantity information company’s estimated net proved underground oil gas reserves changes thereto years 2003 2002 2001 shown following table proved reserves estimated company asset teams composed earth scientists reservoir engineers proved reserve estimates reviewed annually company’s reserves advisory committee ensure rigorous professional standards reserves definitions prescribed us securities exchange commission consistently applied throughout company proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves include additional quantities may result extensions currently proved areas applying secondary tertiary recovery processes yet tested determined economic proved developed reserves quantities expected recovered existing wells existing equipment operating methods net reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate fs56 table v reserve quantity information continued chevrontexaco operates risked service agreement venezuela’s block ll652 located northeast section lake maracaibo chevrontexaco accounting ll652 oil gas activity december 31 2003 recorded 19 million barrels proved crude oil reserves 89 billion cubic feet proved natural gas reserves reserve quantities recorded company’s service agreement boscan field venezuela year agreement reached extends production rights chuchupa gas fields colombia information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevrontexaco significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevrontexaco views reserves development integral part total upstream operations however us securities exchange commission regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 171 million barrels december 31 2003 production began late 2002 oil sands reserves considered standardized measure discounted future net cash flows conventional oil gas reserves found page fs58 fs57 » supplemental information oil gas producing activities continued unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves fs58 table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs59 exhibit index e1 filed herewith october 9 2001 company changed name chevron corporation chevrontexaco corporation filings securities exchange commission prior date may found company’s former name copies exhibits contained herein available security holder upon written request secretary’s department chevrontexaco corporation 6001 bollinger canyon road san ramon california 94583 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 35 annual report form 10k financial statement schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 annual report form 10k lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 17 consolidated financial statements beginning page fs42 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 3rd day march 2005 chevrontexaco corporation david j o’reilly david j o’reilly chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 3rd day march 2005 index management’s discussion analysis consolidated financial statements supplementary data management’s discussion analysis financial condition results operations fs2 fs21 quarterly results stock market data fs22 report management fs23 reports independent registered public accounting firm fs24 consolidated statement income fs25 consolidated statement comprehensive income fs26 consolidated balance sheet fs27 consolidated statement cash flows fs28 consolidated statement stockholders’ equity fs29 notes consolidated financial statements fs30 fs55 fiveyear financial summary fs57 supplemental information oil gas producing activities fs57 fs68 fs1 management’s discussion analysis financial condition results operations key financial results 2003 2002 restated reflect twoforone stock split effected 100 percent stock dividend 2004 income continuing operations major operating area 2003 net income included charges 200 million cumulative effect changes accounting principles related adoption financial accounting standards board fasb statement 143 fas 143 “accounting asset retirement obligations” refer note 25 consolidated financial statements page fs53 additional discussion net income period presented included amounts matters management characterized “special items” described table follows amounts nature significance identified separately help explain changes net income segment income periods help distinguish underlying trends company’s core businesses special items discussed detail major operating area “results operations” section beginning page fs6 “restructuring reorgani zations” described detail note 12 consolidated financial statements page fs39 special items business environment outlook shown “special items” table net special gains 12 billion associated mainly disposition nonstrategic upstream assets benefited income 2004 2002 23 billion 33 billion net charges related company’s investment dynegy inc affiliate refer page fs11 discussion company’s investment dynegy special items recorded 2002 2004 indicative future trends events impact future earnings nature special itemrelated events company may always able anticipate occurrence associated effects income period apart effects specialitem gains charges company’s earnings depend largely profitability upstream exploration production downstream refining marketing transportation business segments single largest variable affects company’s results operations crude oil prices overall earnings trends typically less affected results company’s commodity chemicals segment activities investments company’s longterm competitive position particularly given capitalintensive commoditybased nature industry closely associated company’s ability invest projects provide adequate financial returns manage operating expenses effectively creating maintaining inventory projects depends many factors including obtaining rights explore develop produce hydrocarbons promising areas drilling success ability bring longleadtime capitalintensive projects completion budget schedule efficient profitable operation mature properties company also continuously evaluates opportunities dispose assets key providing sufficient longterm value acquire assets operations complementary asset base help sustain company’s growth addition assetdisposition restructuring plans announced 2003 generated 37 billion sales proceeds 2004 plans may also occur future periods result significant gains losses refer “operating developments” section page fs4 discussion includes references company’s asset disposition activities fs2 comments related earnings trends company’s major business areas follows upstream yeartoyear changes exploration production earnings align closely industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damages disruptions competing fuel prices regional supply interruptions may caused military conflicts civil unrest political uncertainty moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments attempts manage risks operating facilities business longerterm trends earnings segment also function factors besides price fluctuations including changes company’s crude oil natural gas production levels company’s ability find acquire efficiently produce crude oil natural gas reserves level operating expenses associated efficient production oil gas also subject external factors beyond company’s control external factors include general level inflation also prices charged industry’s product serviceproviders affected volatility industry’s supply demand conditions products services operating expenses also affected uninsured damages production facilities caused severe weather civil unrest industry price levels crude oil reached record highs 2004 example price west texas intermediate wti crude oil one benchmark crudes reached 55 per barrel october 2004 wti prices full year averaged 41 per barrel increase approximately 10 per barrel 2003 wti spot price per barrel end february 2005 approximately 51 relatively high industry prices reflected among things increased demand higher economic growth particularly asia united states heightened level geopolitical uncertainty many areas world crude oil supply concerns middle east key producing regions production shut repairs following hurricane ivan gulf mexico september 2004 differential prices high quality lightsweet crude oils us benchmark wti heavier crudes unusually wide upward trend prices 2004 lighter crude oils tracked increased demand light products refineries could process higher quality crudes however demand price heavier crudes dampened due limited number refineries able process lower quality feedstock company produces heavy crude oil including volumes operating service agreement california indonesia partitioned neutral zone saudi arabia kuwait venezuela natural gas prices particularly united states also higher 2004 2003 benchmark prices 2004 henry hub us natural gas peaked october 2004 850 per thousand cubic feet mcf full year prices averaged nearly 600 per mcf compared 550 2003 end february 2005 henry hub spot price 610 per mcf compared supply demand factors natural gas united states resultant trend henry hub benchmark prices certain regions world company operates significantly different supply demand regulatory circumstances typically resulting significantly lower average sales prices company’s production natural gas refer table page fs10 company’s average natural gas prices united states international regions additionally excess supply conditions exist certain parts world cannot easily serve mitigate relatively highprice conditions united states developed markets lack infrastructure difficulties transporting natural gas help address regional imbalance supply demand natural gas chevrontexaco companies industry planning increased investments longterm projects areas excess supply install infrastructure produce liquefy natural gas transport tanker additional investment regasify product markets demand strong supplies plentiful due fs3 management’s discussion analysis financial condition results operations significance overall investment longterm projects natural gas sales prices areas excess supply natural gas transferred companyowned thirdparty processing facility expected remain well sales prices natural gas produced much nearer areas high demand transported existing natural gas pipeline networks united states partially offsetting benefit higher crude oil natural gas prices 2004 5 percent decline company’s worldwide oilequivalent production prior year including volumes produced oil sands production operating service agreement decrease largely result lower production united states due normal field declines property sales production curtailments resulting damages producing operations caused hurricane ivan international oilequivalent production marginally years refer also pages fs7 additional discussion detail production volumes worldwide level oilequivalent production future periods uncertain part opec production quotas potential local civil unrest changing geopolitics could cause production disruptions approximately 25 percent company’s net oilequivalent production 2004 including volumes produced oil sands operating service agreement opecmember countries indonesia nigeria venezuela partitioned neutral zone saudi arabia kuwait although company’s production level 2004 constrained areas opec quotas future production could affected opecimposed limitations future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production refer pages fs4 fs6 discussion company’s major upstream projects certain onshore areas nigeria approximately 45000 barrels per day company’s net production capacity shut since march 2003 civil unrest damage production facilities company adopted phased plan restore operations begun productionresumption efforts certain areas result hurricane ivan september 2004 production fourth quarter 60000 barrels per day lower otherwise would damages producing facilities expected restrict oilequivalent production first quarter 2005 approximately 35000 barrels per day remaining shutin production expected restored second quarter 2005 downstream refining marketing transportation earnings closely tied regional demand refined products associated effects industry refining marketing margins company’s core marketing areas west coast north america us gulf coast latin america asia subsaharan africa specific factors influencing company’s profitability segment include operating efficiencies expenses refinery network including effects downtime due planned unplanned maintenance refinery upgrade projects operating incidents level operating expenses also affected volatility charter expenses company’s shipping operations driven industry’s demand crudeoil tankers factors beyond company’s control include general level inflation especially energy costs operate refinery network downstream earnings improved 2004 compared prior year primarily result increased demand higher margins industry’s refined products areas company equity affiliates operations 2004 refinedproduct margins north america asia highest level recent years industry margins may volatile future depending primarily price movements crude oil feedstocks demand refined products inventory levels refinery maintenance mishaps factors chemicals earnings petrochemicals segment closely tied global chemical demand inventory levels plant capacities additionally feedstock fuel costs tend follow crude oil natural gas price movements influence earnings segment earnings improved 2004 compared 2003 primarily results company’s 50 percentowned chevron phillips chemical company llc cpchem affiliate recorded higher margins sales volumes commodity chemicals higher equity affiliate income operating developments key operating developments events 2004 early 2005 included upstream north america 2004 company closed sale 300 producing properties assets united states canada generating proceeds 25 billion sales accounted less 10 percent oilequivalent production reserves north america part plans announced 2003 dispose assets provide sufficient longterm value company improve overall competitive performance operating efficiency company’s exploration production portfolio gulf mexico company awarded two major engineering contracts development subsea systems floating production facility advance development operated 58 percentowned tahiti prospect major deepwater discovery successful well test original discovery well also conducted 2004 elsewhere fs4 gulf mexico deepwater crude oil discovery announced operated 50 percentowned jack prospect walker ridge block 759 angola late 2004 first production achieved block 0 sanha bomboco project help reduce naturalgas flaring australia mid2004 company announced natural gas discovery wholly owned wheatstone1 well located offshore western australia production tests completed third quarter 2004 early 2005 company evaluating development options cambodia january 2005 company announced crude oil discoveries four exploration wells offshore block chevrontexaco operator block holds 55 percent interest china august 2004 initial crude oil production occurred 16 percentowned bz 251 field located bohai bay crude oil production also began late 2004 hz 193 field company 33 percent working interest faroe islands january 2005 company awarded five offshore exploration blocks faroe islands’ second offshore licensing round blocks near earlier rosebanklochnagar discovery united kingdom company 40 percent interest operator kazakhstan company’s first crude oil karachaganak field loaded russia’s black sea port novorossiysk mid2004 represented first shipment karachaganak crude oil caspian pipeline consortium export pipeline provides access world markets construction continued 2004 company’s 50 percentowned tengizchevroil affiliate sour gas injection sgisecond generation project sgp expected increase total production current capacity 298000 barrels crude oil per day 430000 500000 barrels per day end 2006 expansion dependent upon success sgi libya early 2005 company awarded onshore block 177 libya’s first exploration license round exploration production sharing agreement iv terms company also made operator block 100 percent equity events mark company’s return libya 28year absence nigeria deepwater agbami project several milestones achieved 2004 including initial development drilling third quarter reaching unitization agreement owners area early 2005 contract construction floating production storage offshore loading platform awarded project unitized company’s equity 68 percent company awarded 100 percent contractor interest deepwater nigeria block opl247 eastern part niger delta second quarter 2004 block 247 adjacent block 222 includes company’s usan ukot discoveries third quarter 2004 company announced crude oil discovery usan 5 well additionally early 2005 hydrocarbons encountered usan 6 appraisal well chevrontexaco holds 30 percent interest wells located opl222 nigeria são tomé príncipe joint development zone jdz company awarded right early 2004 conduct exploration activities deepwater block 1 jdz offshore são tomé príncipe nigeria early 2005 company signed productionsharing contract joint development authority chevrontexaco operator 51 percent interest block southern africa company announced discovery deepwater area angola republic congo lianzi1 exploration well third quarter 2004 discovery shared 14kaimi unit located area previous block 14 deepwater crude oil discoveries landana tombua angola chevrontexaco operator 14kaimi unit holds 31 percent interest russia september 2004 company oao gazprom signed sixmonth memorandum understanding jointly undertake feasibility studies possible implementation projects russia united states represents possible opportunity participate development vast natural gas crude oil resource base russia develop close partnership russia’s largest natural gas producer thailand company announced successful exploration appraisal drilling results mid2004 block g443 located gulf thailand block g443 adjacent company’s operated 52 percentowned block b832 trinidad tobago early 2005 company announced successful exploration drilling results offshore manatee 1 exploration well block 6d chevrontexaco operates holds 50 percent interest well united kingdom third quarter 2004 production first crude oil occurred 21 percentowned alba extreme south phase 2 project alba field located block 1626 northeast aberdeen fourth quarter crude oil natural gas discovery made offshore 40 percentowned rosebanklochnagar well 213271z faroeshetland channel venezuela august 2004 company awarded exploration license 100 percent interest block 3 plataforma deltana offshore area venezuela’s atlantic continental shelf exploration rights added company’s existing block 2 license venezuela block 6d trinidad tobago across border venezuela two exploration wells successful 2004 operated 60 percentowned plataforma deltana block 2 company completed onshore construction 30 percentowned hamaca project’s crude oil upgrading facility capacity process 190000 barrels per day heavy crude oil upgrade 180000 barrels per day lighter highervalue crude oil upgrading began october 2004 global natural gas projects qatar sasol chevron chevrontexaco’s 5050 global joint venture sasol south africa entered memorandum understanding qatar petroleum expand oryx gastoliquids project letter intent examine gtl base oils opportunities qatar petroleum sasol chevron also agreed pursue opportunity develop 130000barrelperday integrated gastoliquids project australia north west shelf venture began commissioning fourth lng train september 2004 increased venture’s lng production capacity approximately 50 percent 2004 chevrontexaco holds onesixth interest joint venture company announced fourth quarter 2004 agreement shareholders west african gas pipeline co ltd move forward construction pipeline used transportation natural gas 400 miles nigeria customers ghana benin togo early 2005 company announced plans conduct feasibility study potential liquefied natural gas lng project olokola southwest nigeria future decisions move fs5 management’s discussion analysis financial condition results operations forward olokola lng depend results feasibility study november 2004 chevrontexaco partners brass lng project awarded contract frontend engineering design worldscale lng plant located nigeria lng plant two processing trains potential processing capacity 5 million metric tons chevrontexaco expected supply major amount feed gas lng project angola frontend engineering design work scheduled begin first half 2005 construction multibillion dollar lng processing plant also help eliminate natural gas flaring associated crude oil producing operations company 36 percent ownership interest plant colead project angolan government’s national oil company september 2004 company awarded authorization mexican environment natural resources secretariat environmental impact assessment risk assessment proposed lng receiving regasification terminal offshore baja california mexico december 2004 company awarded natural gas storage permit mexican regulatory energy commission proposed natural gas terminal company also received notice mexican communication transport secretariat port authority public licensing round offshore port terminal november 2004 company announced plans submit permit applications proposed lng import terminal located company’s pascagoula refinery december 2004 company announced finalization 20year agreement regasification capacity proposed sabine pass lng terminal louisiana downstream worldwide reorganization early 2004 company’s downstream businesses began operating global refining marketing supply trading businesses previously functions aligned individual geographic areas company operates realignment targeted improve operating efficiencies financial performance singapore joint venture july 2004 company acquired additional interest singapore refining company pte ltd src increasing ownership 33 percent 50 percent additional interest src expected strengthen chevrontexaco’s existing strategic position asiapacific area one core markets china joint venture january 2005 company announced preliminary agreement business partner china take majority interest company’s existing joint venture operates retail service stations south china asset dispositions throughout 2004 company continued marketing sale service station sites dispositions 1600 sites occurred program’s inception early 2003 end 2004 february 2005 company announced memorandum understanding negotiate sale approximately 140 service stations united kingdom texaco brand terms agreement executed time merger texaco company regained non exclusive rights use texaco brand united states july 1 2004 resumed marketing gasoline texaco retail brand united states mid2004 end year company supplying 1000 texaco retail sites primarily southeast company plans supply additional sites southeast west 2005 chemicals saudi arabia company’s 50 percentowned affiliate cpchem began construction integrated styrene facility expansion adjacent aromatics plant al jubail saudi arabia fourth quarter 2004 project scheduled completion first half 2008 common stock dividends stock repurchase program september 2004 company increased quarterly common stock dividend 10 percent immediately followed dividend increase twoforone stock split form stock dividend connection stock repurchase program initiated april 2004 company purchased 42324000 shares open market 21 billion december purchases end february 2005 increased total shares acquired 47969000 shares 24 billion repurchase program effect three years date initiated acquisitions 5 billion results operations major operating areas following section presents results operations company’s business segments well departments companies managed corporate level refer note 9 beginning page fs36 discussion company’s “reportable segments” defined fas 131 “disclosures segments enterprise related information” aid understanding changes segment income periods discussion applicable two parts first underlying trends second specialitem gains charges tended obscure trends following discussions term “earnings” defined net income segment income cumulative effect changes accounting principles section also read conjunction discussion company’s “business environment outlook” pages fs2 fs4 us upstream exploration production fs6 income continuing operations 2004 nearly 39 billion 700 million higher 2003 nearly 400 million increase represented difference effect earnings respective periods special items discussed remaining 300 million improvement composed 1 billion benefit higher crude oil natural gas prices largely offset effects lower production income continuing operations 2003 32 billion approximately 15 billion 2002 benefit higher prices periods 17 billion partially offset effect lower production company’s average liquids realization 2004 3412 per barrel compared 2666 2003 2134 2002 average natural gas realization 551 per thousand cubic feet 2004 compared 501 289 2003 2002 respectively net oilequivalent production averaged 817000 barrels per day 2004 12 percent 2003 19 percent 2002 lower production 2004 included effects 30000 barrels per day associated property sales 21000 barrels per day production shut result damages facilities hurricane ivan third quarter adjusting effects property sales storms periods presented oilequivalent production 2004 declined 7 percent 2003 14 percent 2002 mainly result normal field declines typically reverse net liquids component oilequivalent production 2004 averaged 505000 barrels per day decline 10 percent 2003 16 percent 2002 excluding effects property sales storms net liquids production 2004 declined 5 percent 11 percent 2003 2002 respectively net natural gas production averaged 19 billion cubic feet per day 2004 16 percent lower 2003 22 percent lower 2002 adjusting effects property sales storms 2004 net natural gas production declined 10 percent 2003 17 percent 2002 refer “selected operating data” table page fs10 threeyear comparative production volumes united states segment income 2004 included special gains 366 million property sales partially offset special charges 55 million resulting adverse litigation matter net special charges 64 million 2003 composed charges 103 million asset impairments associated mainly writedown assets anticipation sale charges 38 million restructuring reorganization mainly employee severance costs gains 77 million property sales special charges 2002 totaled 214 million included 183 million impairment number fields caused writedown proved reserves 31 million costs environmental remediation international upstream exploration production income continuing operations 56 billion 2004 increased 24 billion 2003 approximately 11 billion increase associated higher prices crude oil natural gas approximately 750 million increase result effects special items period discussed another 400 million resulted lower incometax expense periods including benefit 200 million 2004 result changes income tax laws otherwise benefit 200 million lower foreign currency losses largely offset higher transportation costs income continuing operations 32 billion 2003 nearly 400 million higher 2002 higher crude oil natural gas prices accounted increase 900 million partially offset 400 million effect foreign currency changes 100 million higher income taxexpense net oilequivalent production 17 million barrels per day 2004 including produced volumes 140000 net barrels per day oil sands production operating service agreement declined 1 percent 2003 2 percent 2002 excluding lower production associated property sales reduced volumes associated costrecovery provisions certain productionsharing agreements 2004 net oilequivalent production increased nearly 3 percent 2003 1 percent 2002 primarily higher oilequivalent production chad kazakhstan venezuela net liquids component oilequivalent production including volumes produced oil sands operating service agreement declined 1 percent production level 2003 3 percent 2002 excluding effects property sales lower costrecovery volumes certain productionsharing agreements 2004 net liquids fs7 management’s discussion analysis financial condition results operations production increased 1 percent 2003 decreased 1 percent 2002 net natural gas component oilequivalent production 1 percent 2003 6 percent 2002 2004 production increases angola kazakhstan denmark australia partially offset declines associated asset sales 2003 areas production increases included australia kazakhstan philippines united kingdom refer “selected operating data” table page fs10 threeyear comparative international production volumes specialitem gains 2004 included 585 million sale producing properties western canada 266 million sale nonstrategic assets including company’s operations democratic republic congo canadian naturalgas processing business 2003 net special gains 98 million included benefits 150 million related income taxes property sales partially offset asset impairments advance sale charges employee termination costs 2002 special charges 137 million included 100 million asset impairments resulting writedown proved reserves fields africa canada us downstream refining marketing transportation earnings improvement 2004 2003 2002 associated mainly higher margins refined products margins 2004 highest recent years margins 2002 depressed one point hovered near 12year lows sales volumes refined products approximately 15 million barrels per day 2004 increased 5 percent 2003 increase periods primarily higher sales gasoline diesel fuel oil branded gasoline sales volumes 567000 barrels per day increased 2 percent 2003 sales improvement partially reflected reintroduction texaco brand southeast 2003 sales volumes refined products declined 10 percent prior year industry demand 2003 weaker branded gasoline diesel jet fuels sales lower certain supply contracts refer “selected operating data” table page fs10 threeyear comparative refinedproduct sales volumes united states 2003 net special charges 123 million included 160 million environmental remediation employee severance costs associated global downstream restructuring reorganization charges partially offset gains asset sales 2002 special charges 215 million included amounts environmental remediation writedown el paso refinery advance sale litigation matter international downstream refining marketing transportation international downstream segment includes company’s consolidated refining marketing businesses nonus marine operations nonus supply trading activities equity earnings affiliates primarily asiapacific region earnings nearly 2 billion 2004 improved significantly 2003 2002 mainly result higher average margins refined products company affiliate operations higher earnings international shipping operations margins fs8 2004 highest recent years earnings 2004 also included benefit 40 million related changes income tax laws total international refined products sales volumes 24 million barrels per day 2004 4 percent higher 23 million 2003 10 percent higher 22 million 2002 weak economic conditions dampened industry demand 2002 refer “selected operating data” table page fs10 threeyear comparative refinedproduct sales volumes international areas special charges 189 million 2003 included writedown batangas refinery philippines advance conversion product terminal facility employee severance costs associated global downstream restructuring reorganization impairment certain assets anticipation sale company’s share losses asset sale asset impairment equity affiliate special charge 2002 writedown company’s investment publicly traded caltex australia limited affiliate estimated fair value chemicals segment includes company’s oronite division company’s 50 percent share equity investment chevron phillips chemical company llc cpchem 2004 results company’s oronite subsidiary improved higher sales volumes earnings 2004 cpchem increased result increased chemical commodity margins sales volumes higher equity affiliate income protracted weak demand commodity chemicals industry oversupply conditions suppressed earnings segment 2003 2002 consists company’s interest dynegy coal mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies improvement 2003 2004 primarily associated company’s investment dynegy including gains redemption certain dynegy securities higher interest income lower interest expense favorable corporatelevel tax adjustments net change 2002 2003 largely attributable differences effect net special charges 2003 period also included lower interest expense corporate charges compared 2002 net special gains 2003 included benefit 365 million exchange company’s investment dynegy preferred stock cash dynegy securities benefit partially offset charges asset writedowns 84 million primarily gasification business later sold 40 million company’s share asset impairment dynegy employee severance costs 16 million special charges 2002 included 23 billion related dynegy composed 16 billion writedown company’s investment dynegy common preferred stock estimated fair value 680 million company’s share dynegy’s special items asset writedowns revaluations loss asset sale refer also page fs11 “information relating company’s investment dynegy” consolidated statement income comparative amounts certain income statement categories shown following table category amounts associated special items comparative periods also indicated assist explanation periodtoperiod changes besides information section separately disclosed face consolidated statement income gain exchange dynegy securities mergerrelated expenses writedown investments dynegy cumulative effect changes accounting principles matters discussed elsewhere mda note 14 consolidated financial statements page fs39 fs9 management’s discussion analysis financial condition results operations explanations follow variations years amounts table consideration effects special gains charges well income statement categories refer preceding segment discussions section information relating special gains charges sales operating revenues 151 billion 2004 compared 120 billion 2003 98 billion 2002 revenues increased 2004 2003 primarily higher prices crude oil natural gas refined products worldwide income loss equity affiliates increased 2004 2003 earnings improved number affiliates including downstream affiliates asiapacific area tengizchevroil cpchem dynegy caspian pipeline consortium income 2004 included net gains 16 billion primarily upstream property sales compared gains 286 million 94 million 2003 2002 respectively interest income increased 199 million 2004 compared 120 million 2003 2002 result higher balances cash marketable securities foreign currency losses 60 million 199 million 5 million 2004 2003 2002 respectively purchased crude oil products 94 billion 2004 increase 32 percent 2003 due mainly higher prices increased purchases crude oil products crude oil product purchases increased 25 percent 2003 primarily due significantly higher prices crude oil natural gas refined products operating selling general administrative expenses 14 billion increased 13 billion 2003 increases 2004 included costs chartering crude oil tankers transportation expenses 2003 operating selling general administrative expenses increased nearly 1 billion primarily higher freight rates international shipping operations higher costs associated employee pension plans employeebenefit expenses exploration expenses 697 million 2004 570 million 2003 591 million 2002 2004 amounts higher international operations primarily seismic costs expenses associated evaluating feasibility different project alternatives depreciation depletion amortization expenses change materially years consideration effects specialitem charges interest debt expense 406 million 2004 compared 474 million 2003 565 million 2002 lower amount 2004 reflected lower average debt balances decline 2003 2002 reflected lower average interest rates commercial paper variablerate debt lower average debt levels taxes income 198 billion 179 billion 167 billion 2004 2003 2002 respectively increase 2004 2003 primarily reflected weakening us dollar foreign currencydenominated duties company’s european downstream operations income tax expense corresponded effective tax rates 37 percent 2004 43 percent 2003 45 percent 2002 taking account effect net special items refer also note 17 page fs42 consolidated financial statements mergerrelated expenses 576 million 2002 mergerrelated expenses reported 2004 2003 reflecting completion merger integration activities 2002 selected operating data12 fs10 information related investment dynegy inc yearend 2004 chevrontexaco owned approximate 25 percent equity interest common stock dynegy energy provider engaged power generation gathering processing natural gas fractionation storage transportation marketing natural gas liquids company also held investment dynegy preferred stock investment dynegy common stock december 31 2004 carrying value company’s investment dynegy common stock approximately 150 million amount 365 million company’s proportionate interest dynegy’s underlying net assets difference primarily result writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors giving rise decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly appropriate recognize portion difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2004 approximately 450 million investments dynegy notes preferred stock beginning 2004 company held 223 million face value dynegy junior unsecured subordinated notes due 2016 400 million face value dynegy series c convertible preferred stock stated maturity 2033 junior notes redeemed face value 2004 gains 54 million recorded difference face amounts carrying values time redemption face value company’s investment series c preferred stock december 31 2004 400 million stock recorded fair value estimated 370 million december 31 2004 future temporary changes estimated fair value preferred stock reported “other comprehensive income” however future decline fair value deemed temporary charge income period would recorded dividends received preferred stock recognized income period liquidity capital resources cash equivalents marketable securities total balances 107 billion 53 billion december 31 2004 2003 respectively cash provided operating activities 2004 147 billion compared 123 billion 2003 99 billion 2002 amounts net contributions employee pension plans 16 billion 14 billion 246 million 2004 2003 2002 respectively 2004 increase cash provided operating activities mainly reflected higher earnings worldwide upstream downstream businesses cash provided investing activities included proceeds asset sales 37 billion 2004 11 billion 2003 23 billion 2002 cash provided operating activities asset sales 2004 sufficient fund company’s capital exploratory program pay 32 billion dividends stockholders reduce total debt 13 billion repurchase 21 billion common stock increase balance cash equivalents marketable securities 55 billion dividends payments approximately 32 billion 2004 3 billion 2003 2002 made dividends september 2004 company increased quarterly common stock dividend 10 percent 40 cents per share poststock split basis debt capital lease minority interest obligations total debt capital lease balances 113 billion december 31 2004 126 billion yearend 2003 company also minority interest obligations 172 million 268 million december 31 2003 company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 56 billion december 31 2004 60 billion december 31 2003 amounts 47 billion 43 billion reclassified longterm end period respectively yearend 2004 settlement obligations expected require use working capital 2005 company intent ability evidenced committed credit facilities refinance longterm basis company’s practice continually refinance commercial paper maintaining levels believes appropriate yearend 2004 chevrontexaco 47 billion committed credit facilities various major banks permitted refinancing shortterm obligations longterm basis facilities support commercial paper borrowings also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2004 addition company three existing effective “shelf” registrations file securities exchange commission sec together would permit additional registered debt offerings aggregate 38 billion debt securities 2004 repayments longterm debt maturity included 500 million 6625 percent chevrontexaco corporation bonds aggregate 265 million various philippine debt 240 million chevrontexaco corporation 811 percent notes fs11 management’s discussion analysis financial condition results operations third quarter 2004 300 million 6 percent texaco capital inc due june 2005 also retired texaco capital llc wholly owned finance subsidiary issued deferred preferred shares series c series c december 1995 february 2005 company redeemed series c accumulated dividends cost approximately 140 million january 2005 company contributed 98 million permit esop make 144 million debt service payment included principal payment 113 million second quarter 2004 chevrontexaco entered 1 billion interest rate fixedtofloating swap transactions terms swap agreements 250 million 750 million terminate september 2007 february 2008 respectively net cash settlement based difference fixedrate floatingrate interest amounts chevrontexaco’s senior debt rated aa standard poor’s corporation aa2 moody’s investor service except senior debt texaco capital inc rated aa3 chevrontexaco’s us commercial paper rated a1 standard poor’s prime 1 moody’s company’s canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions reductions debt balances december 31 2004 dependent upon many factors including management’s continuous assessment debt appropriate component company’s overall capital structure company believes substantial borrowing capacity meet unanticipated cash requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals company believes flexibility increase borrowings modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings tengizchevroil funding part funding expansion tengizchevroil’s tco production facilities fourth quarter 2004 chevrontexaco purchased tco 22 billion 6124 percent series b notes series b due 2014 interest notes payable semiannually principal repaid semiannually equal installments beginning february 2008 immediately following purchase series b chevrontexaco received tco approximately 18 billion representing repayment subordinated loans company interest dividends 22 billion investment series b notes company intends hold maturity 18 billion distribution recorded consolidated balance sheet “investments advances” common stock repurchase program company announced stock repurchase program march 31 2004 acquisitions 5 billion may made time prevailing prices permitted securities laws legal requirements subject market conditions factors program period three years may discontinued time company purchased 42324000 shares open market 21 billion december 2004 purchases february 2005 increased total shares acquired 47969000 24 billion capital exploratory expenditures total reported expenditures 2004 83 billion including 156 billion company’s share affiliates’ expenditures require cash outlays company 2003 2002 expenditures 74 billion 93 billion respectively including company’s share affiliates’ expenditures 11 billion 14 billion corresponding periods total 2004 reported expenditures 63 billion 76 percent upstream activities compared 77 percent 2003 68 percent 2002 international upstream accounted 71 percent worldwide upstream total 2004 2003 70 percent 2002 reflecting company’s continuing focus international exploration production activities expenditures 2004 increased 13 percent compared 2003 primarily driven higher upstream expenditures downstream spending increased 21 percent 2003 expenditures higher 2002 2003 due part large lease acquisitions north sea gulf mexico spending athabasca oil sands project western canada additional common stock investments dynegy including share spending affiliates company estimates 2005 capital exploratory expenditures 10 billion 20 percent higher 2004 74 billion 74 percent total targeted exploration production activities 49 billion amount targeted outside united states upstream spending targeted promising exploratory prospects deepwater gulf mexico west africa major development projects angola nigeria kazakhstan deepwater gulf mexico included upstream expenditures 400 million develop company’s international natural gas resource base worldwide downstream spending 2005 estimated 19 billion 15 billion refining marketing capital exploratory expenditures fs12 400 million supply transportation projects including pipelines support expanded upstream production investments chemicals businesses 2005 budgeted 200 million estimates energy technology information technology facilities powerrelated businesses total approximately 500 million pension obligations 2004 company’s pension plan contributions totaled 16 billion approximately 13 billion us plans 2005 company expects contributions approximately 400 million actual amounts dependent upon investment results changes pension obligations regulatory environments economic factors additional funding may required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs18 financial ratios current ratio current assets divided current liabilities current ratio adversely affected fact chevrontexaco’s inventories valued lastin firstout lifo basis yearend 2004 book value inventory lower replacement costs based average acquisition costs year approximately 30 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs company’s interest coverage ratio higher 2004 primarily due higher beforetax income lower average debt balances debt ratio total debt percentage total debt plus equity decrease comparable periods due lower average debt levels higher retained earnings financial ratios guarantees offbalancesheet arrangements contractual obligations contingencies direct indirect guarantees amounts exclude indemnifications contingencies associated sale company’s interest equilon motiva 2002 discussed “indemnifications” section page fs14 december 31 2004 company subsidiaries provided guarantees either directly indirectly 963 million notes contractual obligations affiliated companies 130 million third parties described major category amounts carried liabilities company’s obligations guarantees 963 million guarantees provided affiliates 774 million relate borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects approximately 90 percent amounts guaranteed expire 2009 remaining guarantees expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees 189 million balance 963 million represents obligations connection pricing power purchase agreements certain cogeneration affiliates terms guarantees company may required make payments certain conditions affiliate perform agreements recourse provisions third parties assets held collateral pricing guarantees 130 million provided third parties including guarantees approximately 40 million construction loans host governments company’s international upstream operations remaining guarantees 90 million provided principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities 70 percent total amounts guaranteed expire 2009 remainder expiring 2009 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 70 million guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets december 31 2004 chevrontexaco also outstanding guarantees approximately 215 million equilon debt leases following february 2002 disposition interest equilon company received indemnification shell fs13 management’s discussion analysis financial condition results operations oil company shell claims arising guarantees company recorded liability guarantees approximately 45 percent amounts guaranteed expire within 2005 2009 period guarantees remaining amounts expiring 2019 indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments indemnities cover certain contingent liabilities including associated unocal patent litigation company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2004 company paid approximately 28 million contingencies agreed pay approximately 10 million additional award arbitration subject minor adjustments yet resolved company may receive additional requests indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods texaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon indemnities must asserted either early february 2007 later february 2009 claims relating motiva must asserted later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident securitization offbalancesheet arrangements company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2004 approximately 12 billion representing 10 percent chevrontexaco’s total current accounts receivable balance securitized chevrontexaco’s total estimated financial exposure securitizations december 31 2004 approximately 50 million arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experiencing major defaults collection receivables chevrontexaco believes would loss exposure connected thirdparty investments securitizations longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2005 16 billion 2006 17 billion 2007 16 billion 2008 15 billion 2009 15 billion 2010 23 billion total payments agreements approximately 16 billion 2004 14 billion 2003 12 billion 2002 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2005 12 billion 2006 12 billion 2007 13 billion 2008 13 billion 2009 13 billion additionally 2004 company entered 20year agreement acquire regasification capacity sabine pass lng terminal payments 12 billion 20year period expected commence 2010 minority interests company commitments approximately 172 million related minority interests subsidiary companies following table summarizes company’s significant contractual obligations contractual obligations 47 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects repayment entire amount 2006 2008 period includes guarantees 360 lesop leveraged employee stock ownership plan debt 127 due 2005 233 due 2006 financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related volatility crude oil refined products electricity natural gas refinery feedstock prices company uses financial derivative commodity instruments manage exposure price volatility small portion activity including firm commitments anticipated transactions purchase sale crude oil refined products feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids fs14 chevrontexaco also uses financial derivative commodity instruments trading purposes results activity material company’s financial position net income cash flows 2004 company’s positions monitored reported daily basis internal risk control group ensure compliance company’s risk management policy approved audit committee company’s board directors financial derivative instruments used company’s risk management trading activities consist mainly futures options swap contracts traded new york mercantile exchange international petroleum exchange addition crude oil natural gas refined product swap contracts options contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally market quotes independent thirdparty quotes hypothetical 10 percent increase price natural gas crude oil would increase fair value natural gas derivative contracts approximately 40 million reduce fair value crude oil derivative contracts 15 million hypothetical decreases prices commodities would result opposite effects fair values contracts hypothetical effect contracts estimated calculating cash value contracts difference hypothetical contract delivery prices multiplied contract amounts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect foreign exchange contracts hypothetical 10 percent change yearend exchange rates would approximately 50 million interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income 2004 four new swaps initiated hedge portion company’s fixedrate debt yearend 2004 weighted average maturity “receive fixed” interest rate swaps approximately three years “receive floating” swaps outstanding year end hypothetical increase 10 basis points marketfixed interest rates would reduce fair value “receive fixed” swaps approximately 4 million financial derivative instruments discussed material change market risk presented 2003 hypothetical variances used section selected illustrative purposes represent company’s estimation market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1 annual report transactions related parties chevrontexaco enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements internationally longterm purchase agreements place company’s refining affiliate thailand refer page fs14 discussion management believes foregoing agreements others negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe company many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive company party 70 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater resolution actions may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period company use mtbe manufacture gasoline united states detectable levels mtbe gasoline environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries oil fields service stations terminals land development areas whether operating closed sold following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws 2004 company recorded additional provisions estimated remediation costs primarily refined products marketing sites various operating closed divested facilities united states company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2004 recorded liability material company’s financial position results operations liquidity fs15 management’s discussion analysis financial condition results operations december 31 2004 chevrontexaco involved remediation activities 210 sites identified potentially responsible party otherwise us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2004 107 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevrontexaco assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remaining yearend 2004 environmental reserves balance 940 million 712 million related 2000 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 228 million associated various sites international downstream 111 million upstream 69 million chemicals 48 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although amount future costs may material company’s results operations period recognized company expect costs material adverse effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies prior january 1 2003 additional reserves dismantlement abandonment restoration worldwide oil gas coal properties end productive lives included costs related environmental issues recognized unitofproduction basis accumulated depreciation depletion amortization effective january 1 2003 company implemented fas 143 “accounting asset retirement obligations” fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability reasonably estimated liability balance asset retirement obligations yearend 2004 29 billion refer also note 25 page fs53 related fas 143 company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevents estimation fair value asset retirement obligation refer “environmental matters” page fs18 additional information related environmental matters income taxes company estimates income tax expense liabilities quarterly liabilities generally finalized individual taxing authorities several years end annual period income taxes estimated us federal income tax liabilities settled 1996 chevrontexaco formerly chevron 1997 chevrontexaco global energy inc formerly caltex 1991 texaco california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination global operations chevrontexaco affiliates operations approximately 180 countries areas company affiliates significant operations include united states canada australia united kingdom norway denmark france partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad south africa indonesia philippines singapore china thailand venezuela argentina brazil colombia trinidad tobago south korea company’s caspian pipeline consortium cpc affiliate operates russia kazakhstan company’s tengizchevroil affiliate operates kazakhstan company’s cpchem affiliate manufactures markets wide range petrochemicals worldwide basis manufacturing facilities united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken host governments increase public ownership company’s partially wholly owned businesses impose additional taxes royalties company’s operations fs16 certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest acts violence strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination crude oil natural gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability approximately 200 million time possible maximum net amount could owed chevrontexaco estimated 50 million timing settlement exact amount within range estimates uncertain suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions company decides continue development costs wells expensed december 31 2004 company 671 million suspended exploratory wells included properties plant equipment increase 122 million 2003 increase 193 million 2002 balance yearend 2004 primarily reflects drilling activities united states nigeria sec issued several comment letters companies oil gas industry related accounting suspended exploratory wells particularly suspended certain circumstances one year company’s accounting policy regard capitalize cost exploratory wells pending determination whether wells found proved reserves costs wells find proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending one following 1 decisions additional major capital expenditures 2 results additional exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed determination whether proved reserves found cannot made within one year following completion drilling exploratory well costs expensed topic discussed september 2004 meeting emerging issues task force eitf issue 049 “accounting suspended well costs” eitf 049 discussion centered whether certain circumstances would permit continued capitalization costs exploratory well beyond one year absence plans another exploratory well outcome september 2004 eitf meeting agreement eitf fasb circumstances outlined inconsistent provisions fasb statement 19 “financial accounting reporting oil gas producing companies” fas 19 amendment fas 19 would required formally adopt view february 2005 fasb issued proposed fasb staff position fsp amend fas 19 refer note 21 page fs45 consolidated financial statements discussion fsp sec’s comment letters company’s costs associated suspended exploratory wells future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 671 million suspended wells yearend 2004 uncertain given referenced deliberations sec fasb effect normal projectevaluation future drilling activities wells suspended accounting buysell contracts january february 2005 securities exchange commission sec issued comment letters chevrontexaco companies oil gas industry requesting disclosure information related accounting buysell contracts buysell contract company agrees buy specific quantity quality commodity delivered specific location simultaneously agreeing sell specified quantity quality commodity different location counterparty physical delivery occurs side transaction risk reward ownership evidenced title transfer assumption environmental risk transportation scheduling credit risk nonperformance counterparty parties settle side buysell separate invoicing company routinely buysell contracts primarily united states downstream business associated crude oil refined products crude oil contracts used facilitate company’s crude oil marketing activity includes purchase sale crude oil production fulfillment company’s supply arrangements physical delivery location crude oil specifications purchase crude oil supply company’s refining system refined products buysell arrangements used help fulfill company’s supply agreements customer locations specifications company accounts buysell transactions consolidated statement income monetary transaction title passes risk reward ownership assumed counterparties issue sec whether industry’s accounting buysell contracts instead shown net income statement accounted provisions accounting principles board apb opinion 29 “accounting nonmonetary transactions” apb 29 topic deliberation emerging issues task force eitf fasb issue 0413 “accounting purchases sales inventory counterparty” eitf first discussed issue november 2004 additional research performed fasb staff topic discussed future eitf meeting issue deliberation sec staff directed chevrontexaco companies january february 2005 comment letters disclose face income statement amounts asso fs17 management’s discussion analysis financial condition results operations ciated buysell contracts discuss footnote financial statements basis underlying accounting regard latter company’s accounting treatment buysell contracts based view transactions monetary nature monetary transactions outside scope apb 29 company believes accounting also supported indicators gross reporting purchases sales paragraph 3 eitf issue 9919 “reporting revenue gross principal versus net agent” additionally fasb interpretation 39 “offsetting amounts related certain contracts” fin 39 prohibits receivable netted payable receivable subject credit risk unless right offset exists enforceable law company also views netting separate components buysell contracts income statement inconsistent gross presentation fin 39 requires resulting receivable payable balance sheet company’s buysell transactions also similar “barrel back” example used accounting literature including eitf issue 0311 “reporting realized gains losses derivative instruments subject fasb statement 133 ‘held trading purposes’ defined issue 023” indicates company’s decision show buyselltypes transactions gross income statement matter judgment relevant facts circumstances company’s activities derivatives implementation group dig issue k1 “miscellaneous determining whether separate transactions viewed unit company notes accounting buysell contracts separate purchases sales contrast accounting types contracts typically described industry exchange contracts considered nonmonetary nature appropriately shown net income statement exchange contract example one company agrees exchange refined products one location another company’s quantity refined products another location upon transfer amounts may invoiced transportation quality differentials among things unlike buysell contracts obligations party perform contract independent risks rewards ownership separately transferred shown company’s consolidated statement income “sales operating revenues” three years ending december 31 2004 included 18650 million 14246 million 7963 million respectively buysell contracts revenue amounts associated buysell contracts represented 12 percent total “sales operating revenues” 2004 2003 8 percent 2002 costs associated buysell revenue amounts included “purchased crude oil products” consolidated statement income period contingencies chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant may take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevrontexaco sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevrontexaco estimated worldwide environmental spending 2004 approximately 11 billion consolidated companies included expenditures 285 million environmental capital expenditures approximately 810 million costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2005 total worldwide environmental capital expenditures estimated 710 million capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability fs18 information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation oil gas reserves sec rules require “ geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” beginning page fs63 changes estimates three years ending december 31 2004 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs68 estimates provedreserve values yearend 20022004 based yearend prices time note 1 consolidated financial statements includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment property plant equipment investments affiliates” page fs20 includes reference conditions downward revisions proved reserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements page fs30 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan expense based number actuarial assumptions two critical assumptions expected long term rate return plan assets discount rate applied pension plan obligations postretirement employee benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb expense discount rate applied benefit obligations assumed health care costtrend rates used calculation benefit obligations note 22 consolidated financial statements beginning page fs46 includes information three years ending december 31 2004 components pension opeb expense underlying assumptions well funded status company’s pension plans end 2004 2003 estimate longterm rate return pension assets company employs rigorous process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations regularly updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies example expected longterm rate return united states pension plan assets account 70 percent company’s pension plan assets remained 78 percent since 2002 yearend marketrelated value us pension plan assets used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans outside united states market value assets measurement date used calculating pension expense discount rate assumptions used determine pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2004 company calculated us pension obligation using 58 percent discount rate discount rates used end 2003 2002 6 percent 68 percent respectively increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2004 564 million indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan accounted 60 percent companywide pension obligation would reduced total pension plan expense 2004 approximately 45 million 1 percent increase discount rate plan would reduced total benefit plan expense 2004 approximately 115 million actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2004 company’s pension plan contributions totaled 16 billion approximately 13 billion us plans 2005 company expects contributions approximately 400 million actual contribution amounts dependent upon investment results changes pension obligations regulatory environments economic factors additional funding may required investment returns insufficient offset increases plan obligations fs19 management’s discussion analysis financial condition results operations pension expense recorded consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments depending upon funding status different plans either longterm prepaid asset longterm liability recorded unfunded accumulated benefit obligation excess recorded liabilities recorded “other comprehensive income” see note 22 consolidated financial statements beginning page fs46 pensionrelated balance sheet effects end 2004 2003 company’s opeb plans expense 2004 197 million also recorded “operating expenses” “selling general administrative expenses” business segments december 31 2004 discount rate applied company’s opeb obligations 58 percent discount rate used us pension obligations effective january 1 2005 company amended main us postretirement medical plan limit future increases company contribution current retirees increase company contribution capped 4 percent year future retirees 4 percent cap effective retirement assumed health care cost trend rates start 106 percent 2004 gradually drop 48 percent 2010 beyond employee elects retire trend rates capped 4 percent indication discount rate sensitivity determination opeb expense 2004 1 percent increase discount rate company’s primary us opeb plan accounted 90 percent companywide opeb obligation would decreased opeb expense approximately 20 million impairment property plant equipment investments affiliates company assesses property plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supply demand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions amount income statement classification major impairments ppe three years ending december 31 2004 included commentary business segments elsewhere discussion well note 2 consolidated financial statements beginning page fs32 estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets asset held sale estimated proceeds less costs sell less associated carrying values contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income refer business segment discussions elsewhere discussion note 2 consolidated financial statements page fs32 effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2004 fs20 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss american jobs creation act 2004 october 2004 american jobs creations act 2004 act passed law act provides deduction income qualified domestic refining upstream production activities phased 2005 2010 specific category income company expects net effect provision act result decrease federal effective tax rate 2005 2006 approximately 34 percent based current earnings levels long term company expects new deduction result decrease federal effective tax rate 32 percent category income based current earnings levels guidance fasb staff position fas 1091 “application fasb statement 109 ‘accounting income taxes’ tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities provided american jobs creation act 2004 treated “special deduction” described fas 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed company’s tax return act also provides limited opportunity repatriate earnings outside united states special reduced tax rate low 525 percent early 2005 company process reviewing guidance irs issued january 13 2005 regarding provision also considering relevant information company anticipate major change plans repatriating earnings international operations provisions act new accounting standards fasb interpretation 46 “consolidation variable interest entities” fin 46 january 2003 fin 46 issued established standards determining circumstances variable interest entity vie consolidated primary beneficiary fin 46 also requires disclosures vies company required consolidate significant variable interest december 2003 fasb issued fin 46r includes amendments fin 46 also requires application interpretation affected entities later march 31 2004 calendar yearreporting companies prior requirement companies required apply interpretation specialpurpose entities december 31 2003 full adoption interpretation march 31 2004 including requirement relating specialpurpose entities material impact company’s results operations financial position liquidity fasb staff position fas 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp fas 1062 december 2003 medicare prescription drug improvement modernization act 2003 “act” became law act introduced prescription drug benefit medicare well federal subsidy sponsors retiree health care plans provide benefit least actuarially equivalent medicare part may 2004 fasb issued fsp fas 1062 one us subsidiary deemed least actuarially equivalent eligible federal subsidy effect company’s postretirement benefit obligation associated annual expense de minimis fasb statement 151 “inventory costs amendment arb 43 chapter 4” fas 151 november 2004 fasb issued fas 151 effective company january 1 2006 standard amends guidance accounting research bulletin arb 43 chapter 4 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs spoilage addition standard requires allocation fixed production overheads costs conversion based normal capacity production facilities company currently evaluating impact standard fasb statement 123r “sharebased payment” fas 123r december 2004 fasb issued fas 123r requires compensation cost relating sharebased payments recognized company’s financial statements company currently accounts payments recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations company preparing implement standard effective july 1 2005 although transition method used adopt standard selected impact adoption expected minimal impact company’s results operations financial position liquidity refer note 1 beginning page fs30 company’s calculation pro forma impact net income fas 123 would similar fas 123r fasb statement 153 “exchanges nonmonetary assets amendment apb opinion 29” fas 153 december 2004 fasb issued fas 153 effective company assetexchange transactions beginning july 1 2005 apb 29 assets received certain types nonmonetary exchanges permitted recorded carrying value assets exchanged ie recorded carryover basis amended fas 153 assets received circumstances recorded instead fair values past chevrontexaco engaged large number nonmonetary asset exchanges significant amounts fs21 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx pacific exchange february 25 2005 stockholders record numbered approximately 227000 restrictions company’s ability pay dividends fs22 management’s responsibility financial statements stockholders chevrontexaco corporation management chevrontexaco responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states stated report included herein board directors chevrontexaco audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2004 company management’s assessment effectiveness internal control financial reporting december 31 2004 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein david j o’reilly stephen j crowe mark humphrey david j o’reilly stephen j crowe mark humphrey chairman board vice president vice president chief executive officer chief financial officer comptroller march 2 2005 fs23 report independent registered public accounting firm stockholders board directors chevrontexaco corporation completed integrated audit chevrontexaco corporation’s 2004 consolidated financial statements internal control financial reporting december 31 2004 audits 2003 2002 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income stockholders’ equity cash flows present fairly material respects financial position chevrontexaco corporation subsidiaries december 31 2004 2003 results operations cash flows three years period ended december 31 2004 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a 2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion internal control financial reporting also opinion management’s assessment included accompanying management’s report internal control financial reporting company maintained effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2004 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate discussed note 25 page fs53 financial statements company changed method accounting asset retirement obligations january 1 2003 pricewaterhousecoopers llp san francisco california march 2 2005 fs24 consolidated statement income millions dollars except pershare amounts fs25 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs26 consolidated balance sheet millions dollars except pershare amounts 2003 restated reflect twoforone stock split effected 100 percent stock dividend september 2004 see accompanying notes consolidated financial statements fs27 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs28 consolidated statement stockholders’ equity shares thousands amounts millions dollars 2003 2002 restated reflect twoforone stock split effected 100 percent stock dividend september 2004 see accompanying notes consolidated financial statements fs29 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general chevrontexaco manages investments provides administrative financial management support us foreign subsidiaries affiliates engage fully integrated petroleum chemicals coal mining operations addition chevrontexaco holds investments power generation business collectively companies conduct business activities 180 countries exploration production upstream operations consist exploring developing producing crude oil natural gas also marketing natural gas refining marketing transportation downstream operations relate refining crude oil finished petroleum products marketing crude oil natural gas many products derived petroleum transporting crude oil natural gas petroleum products pipeline marine vessel motor equipment rail car chemical operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lubricant oil additives company’s consolidated financial statements prepared accordance principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percent owned variable interest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income deferred income taxes provided gains losses investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value subsequent recoveries carrying value investments reported “other comprehensive income” differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference company’s share affiliate’s reported earnings adjusted quarterly appropriate reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity commodity derivative instruments intended manage price risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” shortterm investments markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized wells find commercially producible reserves cannot classified proved pending fs30 4 note 1 summary significant accounting policies continued one following 1 decisions additional major capital expenditures 2 results additional exploratory wells way firmly planned 3 securing final regulatory approvals development otherwise well costs expensed determination whether proved reserves found cannot made within one year following completion drilling exploratory wells costs expensed refer note 21 page fs45 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession field basis appropriate globally refining marketing transportation chemical areas impairment reviews generally done refinery plant marketing area marketing assets country basis impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value effective january 1 2003 company implemented financial accounting standards board statement 143 “accounting asset retirement obligations fas 143” fair value liability asset retirement obligation recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 25 page fs53 relating asset retirement obligations includes additional information company’s adoption fas 143 previously crude oil natural gas coal producing properties provision made depreciation expense anticipated abandonment restoration costs end property’s useful life depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required oil gas coal producing properties liability asset retirement obligation made following fas 143 refer “properties plant equipment” note discussion fas 143 federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevrontexaco interest producers generally recognized basis company’s net working interest entitlement method refer note 16 page fs41 discussion accounting buysell arrangements stock compensation december 31 2004 company stockbased employee compensation plans described fs31 notes consolidated financial statements millions dollars except pershare amounts 4 note 1 summary significant accounting policies continued fully note 22 beginning page fs46 company accounts plans recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations following table illustrates effect net income earnings per share company applied fairvaluerecognition provisions financial accounting standards board fasb statement 123 “accounting stockbased compensation” stockbased employee compensation costs stock appreciation rights reported net income included fairvalue method rights 10 1 2004 2003 2002 respectively fair value estimated using blackscholes optionpricing model stock options stock appreciation rights estimated based method outlined sfas 123 instruments pershare amounts periods reflect twoforone stock split effected 100 percent stock dividend september 2004 amounts 2003 include benefit 008 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly company’s retained earnings included net income period refer note 20 beginning page fs44 discussion company’s plan implement fasb statement 123r “sharebased payment” effective july 1 2005 note 2 special items financial information net income period presented includes amounts categorized company “special items” assist explanation trend results listed following table categories items net increase decrease net income related tax effects 2004 company recorded special gains 1217 sale nonstrategic crude oil natural gas assets primarily united states canada special charge 55 litigation matter 2003 impairments 103 30 respectively recorded various us international oil gas producing properties reflecting lower expected recovery proved reserves writedown market value assets anticipation sale impairments 123 downstream assets conversion refinery products terminal writedown market value assets anticipation sale also 2003 chevrontexaco exchanged dynegy series b preferred stock cash notes series c preferred stock 365 difference fair value items company’s carrying value included net income 2002 company recorded writedowns 1626 investment dynegy common preferred stock 136 investment publicly traded caltex australia affiliate respective estimated fair values writedowns required declines fair values investments carrying values deemed temporary refer note 14 beginning page fs39 additional information company’s investment dynegy caltex australia also 2002 impairments 183 recorded various us exploration production properties 100 international projects aggregate effects income statement categories special items including chevrontexaco’s proportionate share special items related equity affiliates reflected following table fs32 4 note 2 special items financial information continued financial information follows includes 13 96 66 2004 2003 2002 respectively company’s share equity affiliates’ foreign currency effects excess market value carrying value inventories lifo method used 3036 2106 1571 december 31 2004 2003 2002 respectively market value generally based average acquisition costs year lifo profits 36 82 13 included net income years 2004 2003 2002 respectively note 3 common stock split july 28 2004 company’s board directors approved twoforone stock split form stock dividend company’s stockholders record august 19 2004 distribution shares september 10 2004 total number authorized common stock shares associated par value unchanged action pershare amounts financial statements reflect stock split periods presented effect common stock split reflected consolidated balance sheet “common stock” “capital excess par value” note 4 information relating consolidated statement cash flows “net decrease operating working capital” composed following 2003 “net cash provided operating activities” included 890 “decrease deferred charges” decrease amount “other” related balance sheet netting certain pensionrelated asset liability accounts accordance requirements financial accounting standards board fasb statement 87 “employers’ accounting pensions” “net purchases sales treasury shares” 2004 included share repurchases 21 billion related company’s common stock repurchase program partially offset issuance shares exercise stock options major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented mda presented following table fs33 notes consolidated financial statements millions dollars except pershare amounts 4 note 4 information relating consolidated statement cash flows continued net noncash additions 212 2004 1183 2003 195 2002 includes deferred payment 210 related 1993 acquisition company’s interest tengizchevroil joint venture note 5 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevrontexaco corporation cusa subsidiaries manage operate chevrontexaco’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum natural gas liquids excluding regulated pipeline operations chevrontexaco cusa also holds chevrontexaco’s investments chevronphillips chemical company llc cpchem joint venture dynegy inc dynegy accounted using equity method 2003 2002 chevrontexaco implemented legal reorganizations certain chevrontexaco subsidiaries transferred assets cusa chevrontexaco companies merged cusa summarized financial information cusa consolidated subsidiaries presented following table gives retroactive effect reorganization manner similar pooling interests periods presented companies always combined reorganization occurred january 1 2002 however financial information included table may reflect financial position operating results future historical results periods presented reorganization actually occurred january 1 2002 2003 net income includes charge 323 cumulative effect changes accounting principles includes assets held sale 1052 december 31 2003 cusa’s net loss 1895 2002 included net charges 2555 asset writedowns dispositions 2306 related dynegy note 6 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevrontexaco corporation ctc principal operator chevrontexaco’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevrontexaco companies chevrontexaco corporation guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented following table 2004 ctc’s paidin capital decreased 85 capital settlements restrictions ctc’s ability pay dividends make loans advances december 31 2004 note 7 stockholders’ equity retained earnings december 31 2004 2003 included approximately 3950 1300 respectively company’s share undistributed earnings equity affiliates december 31 2004 151 million shares chevrontexaco’s common stock remain available issuance fs34 4 note 7 stockholders’ equity continued 160 million shares reserved issuance chevrontexaco corporation longterm incentive plan ltip amended restated approved stockholders 2004 addition approximately 622 thousand shares remain available issuance 800 thousand shares company’s common stock reserved awards chevrontexaco corporation nonemployee directors’ equity compensation deferral plan nonemployee directors’ plan approved stockholders 2003 refer note 3 page fs33 discussion company’s common stock split note 8 financial derivative instruments commodity derivative instruments chevrontexaco exposed market risks related price volatility crude oil refined products electricity natural gas refinery feedstock company uses financial derivative commodity instruments manage exposure small portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids company also uses financial derivative commodity instruments limited trading purposes company maintains policy requiring international swaps derivatives association agreement govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transaction bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty “net” markedtomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk company’s policy use netting agreements certain counterparties conducts significant transactions fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income 2004 four new swaps relating portion company’s fixedrate debt initiated yearend 2004 interest rate swaps outstanding related fixedrate debt weighted average maturity approximately three years fair values interest rate swaps reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported directly income part “interest debt expense” activities reported “operating activities” consolidated statement cash flows fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 5815 7229 estimated fair values 6444 7709 december 31 2004 2003 respectively interest rate swaps notional principal amounts 1665 665 estimated fair values 36 65 december 31 2004 2003 respectively company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 8789 3803 december 31 2004 2003 respectively balances 7338 2803 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately 23 years financial derivative instruments discussed material change market risk presented 2003 concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s fs35 notes consolidated financial statements millions dollars except pershare amounts 4 note 8 financial derivative instruments continued broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient letters credit principal security obtained support lines credit investment dynegy notes preferred stock beginning 2004 company held investments 223 face value dynegy junior unsecured subordinated notes due 2016 400 face value dynegy series c convertible preferred stock stated maturity date 2033 junior notes redeemed face value 2004 gains 54 recorded difference face amounts carrying values time redemption face value company’s investment series c preferred stock december 31 2004 400 stock recorded fair value estimated 370 december 31 2004 future temporary changes estimated fair value preferred stock reported “other comprehensive income” however future decline fair value deemed temporary charge income period would recorded dividends payable preferred stock recognized income period note 9 operating segments geographic data although subsidiary chevrontexaco responsible affairs chevrontexaco corporation manages investments subsidiaries affiliates purpose investments grouped follows upstream exploration production downstream refining marketing transportation chemicals first three groupings represent company’s “reportable segments” “operating segments” defined fas 131 “disclosures segments enterprise related information” segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined fas 131 codm company’s executive committee senior officers includes chief executive officer turn reports board directors chevrontexaco corporation operating segments represent components company described fas 131 terms engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assess performance c discrete financial information available segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level also approves capital exploratory funding major projects major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members executive committee also individual management responsibilities participate committees purposes acting codm “all other” activities include company’s interest dynegy coal mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” mergerrelated expenses 2002 also included “all other” aftertax segment income loss continuing operations presented following table fs36 4 note 9 operating segments geographic data continued segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2004 2003 follow assets consist primarily worldwide cash equivalents marketable securities real estate information systems company’s investment dynegy coal mining operations power generation businesses technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2004 2003 2002 presented following table products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products revenues chemicals segment derived primarily manufacture sale additives lubricants fuel “all other” activities include revenues coal mining operations power generation businesses insurance operations real estate activities technology companies united states country chevrontexaco generates significant revenues united kingdom revenues amounted 13985 12121 10816 2004 2003 2002 respectively fs37 notes consolidated financial statements millions dollars except pershare amounts 4 note 9 operating segments geographic data continued segment income taxes segment income tax expenses years 2004 2003 2002 follows see note 25 page fs53 information concerning cumulative effect changes accounting principles due adoption fas 143 “accounting asset retirement obligations” income tax expense 100 50 26 related discontinued operations 2004 2003 2002 respectively included segment information additional information segmentation major equity affiliates contained note 14 beginning page fs39 information related properties plant equipment segment contained note 15 page fs41 note 10 litigation company many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive company party 70 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater resolution actions may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period company use mtbe manufacture gasoline united states detectable levels mtbe gasoline note 11 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2004 2003 2002 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2004 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows fs38 4note 12 restructuring reorganization costs note 12 restructuring reorganization costs connection various reorganizations restructurings across several businesses corporate departments company recorded beforetax charges 258 146 tax 2003 estimated termination benefits approximately 4500 employees nearly half liability related global downstream segment substantially employee reductions expected occur end 2005 beginning 2004 100 liability remained employee severance charges recorded 2002 2001 associated merger chevron corporation texaco inc balance related primarily deferred payment options elected certain employees terminated end 2003 approximately 80 liability paid 2004 remainder january 2005 activity company’s liability related reorganizations restructurings 2004 summarized following table substantially balance december 31 2004 related employee severance costs part presumed ongoing benefit arrangement applicable accounting rules fas 146 “accounting costs associated exit disposal activities” paragraph 8 footnote 7 therefore company accounts severance costs accordance fas 88 “employers’ accounting settlements curtailments defined pension plans termination benefits” december 31 2004 amount categorized current accrued liability consolidated balance sheet associated charges period categorized “operating expenses” “selling general administrative expenses” consolidated statement income note 13 assets held sale discontinued operations december 31 2004 december 31 2003 company classified 162 1100 respectively net properties plant equipment “assets held sale” consolidated balance sheet assets category end 2004 related group service stations assets expected disposed 2005 summarized income statement information relating discontinued operations follows included 2004 aftertax amount gains totaling 257 related sale canadian naturalgas processing business wholly owned subsidiary democratic republic congo certain producing properties gulf mexico assets sold disposed classified discontinued operations mainly cash flows assets notwill eliminated ongoing operations company note 14 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost follows descriptions major affiliates follows tengizchevroil chevrontexaco 50 percent equity ownership interest tco joint venture formed 1993 develop tengiz korolev oil fields kazakhstan 40year period 2004 part funding expansion tco’s production facilities chevrontexaco purchased tco 2200 6124 percent series b notes due 2014 guaranteed tco interest notes payable semiannually principal repaid semiannually equal installments beginning february 2008 immediately following purchase series b notes chevrontexaco received tco approximately 1800 representing repayment subordinated loans company interest dividends 2200 investment series b notes company intends hold fs39 notes consolidated financial statements millions dollars except pershare amounts note 14 investments advances continued maturity 1800 distribution recorded “investments advances” lgcaltex oil corporation chevrontexaco owns 50 percent lgcaltex joint venture formed 1967 lg group caltex engage importing refining marketing petroleum products petrochemicals south korea star petroleum refining company ltd chevrontexaco 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery map ta phut thailand petroleum authority thailand owns remaining 36 percent sprc caltex australia ltd chevrontexaco 50 percent equity ownership interest caltex australia limited cal remaining 50 percent cal publicly owned 2002 company wrote investment cal 136 estimated fair value september 30 2002 december 31 2004 fair value chevrontexaco’s share cal common stock 1130 aggregate carrying value company’s investment cal approximately 80 lower amount underlying equity cal net assets chevron phillips chemical company llc chevrontexaco owns 50 percent cpchem formed 2000 chevron merged petrochemicals businesses phillips petroleum company december 31 2004 company’s carrying value investment cpchem approximately 130 lower amount underlying equity cpchem’s net assets dynegy inc chevrontexaco owns approximate 25 percent equity interest common stock dynegy energy provider engaged power generation gathering processing natural gas fractionation storage transportation marketing natural gas liquids company also holds investments dynegy preferred stock investment dynegy common stock december 31 2004 carrying value company’s investment dynegy common stock approximately 150 amount 365 company’s proportionate interest dynegy’s underlying net assets difference primarily result writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors contributing decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly appropriate reflect difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2004 approximately 450 investments dynegy notes preferred stock refer note 8 page fs35 discussion investments information “sales operating revenues” consolidated statement income includes 7933 6308 6522 affiliated companies 2004 2003 2002 respectively “purchased crude oil products” includes 2548 1740 1839 affiliated companies 2004 2003 2002 respectively “accounts notes receivable” consolidated balance sheet includes 1188 827 due affiliated companies december 31 2004 2003 respectively “accounts payable” includes 192 118 due affiliated companies december 31 2004 2003 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevrontexaco’s total share company’s share income underlying equity net assets investments includes effects writedowns certain investments largely related dynegy inc caltex australia ltd described preceding section fs40 4 note 15 properties plant equipment note 15 properties plant equipment1 refer note 25 page fs53 discussion effect 2003 ppe balances depreciation expenses related adoption fas 143 “accounting asset retirement obligations” net accumulated abandonment restoration costs 2263 december 31 2002 net dry hole expense related prior years’ expenditures 58 124 36 2004 2003 2002 respectively depreciation expense includes accretion expense 93 132 2004 2003 respectively depreciation expense includes discontinued operations 22 58 62 2004 2003 2002 respectively primarily coal real estate assets management information systems note 16 accounting buysell contracts january february 2005 sec issued comment letters chevrontexaco companies oil gas industry requesting disclosure information related accounting buysell contracts buysell contract company agrees buy specific quantity quality commodity delivered specific location simultaneously agreeing sell specified quantity quality commodity different location counterparty physical delivery occurs side transaction risk reward ownership evidenced title transfer assumption environmental risk transportation scheduling credit risk nonperformance counterparty parties settle side buysell separate invoicing company routinely buysell contracts primarily united states downstream business associated crude oil refined products crude oil contracts used facilitate company’s crude oil marketing activity includes purchase sale crude oil production fulfillment company’s supply arrangements physical delivery location crude oil specifications purchase crude oil supply company’s refining system refined products buysell arrangements used help fulfill company’s supply agreements customer locations specifications company accounts buysell transactions consolidated statement income monetary transaction title passes risks rewards ownership assumed counterparties issue sec whether industry’s accounting buysell contracts instead shown net income statement accounted provisions accounting principles board apb opinion 29 “accounting nonmonetary transactions” apb 29 topic deliberation emerging issues task force eitf fasb issue 0413 “accounting purchases sales inventory counterparty” eitf first discussed issue november 2004 additional research performed fasb staff topic discussed future eitf meeting issue deliberation sec staff directed chevrontexaco companies january february 2005 comment letters disclose face income statement amounts associated buysell contracts discuss footnote financial statements basis underlying accounting regard latter company’s accounting treatment buysell contracts based view fs41 notes consolidated financial statements millions dollars except pershare amounts 4 note 16 accounting buysell contracts continued transactions monetary nature monetary transactions outside scope apb 29 company believes accounting also supported indicators gross reporting purchases sales paragraph 3 eitf issue 9919 “reporting revenue gross principal versus net agent” additionally fasb interpretation 39 “offsetting amounts related certain contracts” fin 39 prohibits receivable netted payable receivable subject credit risk unless right offset exists enforceable law company also views netting separate components buysell contracts income statement inconsistent gross presentation fin 39 requires resulting receivable payable balance sheet company’s buysell transactions also similar “barrel back” example used accounting literature including eitf issue 0311 “reporting realized gains losses derivative instruments subject fasb statement 133 ‘held trading purposes’ defined issue 023” indicates company’s decision show buyselltypes transactions gross income statement matter judgment relevant facts circumstances company’s activities derivatives implementation group dig issue k1 “miscellaneous determining whether separate transactions viewed unit” company notes accounting buysell contracts separate purchases sales contrast accounting types contracts typically described industry exchange contracts considered nonmonetary nature appropriately shown net income statement exchange contract example one company agrees exchange refined products one location another company’s quantity refined products another location upon transfer amounts may invoiced transportation quality differentials among things unlike buysell contracts obligations party perform contract independent risks rewards ownership separately transferred shown company’s consolidated statement income “sales operating revenues” three years ending december 31 2004 included 18650 14246 7963 respectively buysell contracts costs associated buysell revenue amounts included “purchased crude oil products” consolidated statement income period note 17 taxes excludes income tax expense 100 50 26 related discontinued operations 2004 2003 2002 respectively excludes us deferred tax benefit 191 foreign deferred tax expense 170 associated adoption fas 143 2003 related cumulative effect changes accounting method 2003 2004 beforetax income us operations including related corporate charges 7776 compared beforetax income 5664 2003 beforetax loss 2162 2002 international operations beforetax income 12775 7012 6262 2004 2003 2002 respectively us federal income tax expense reduced 176 196 208 2004 2003 2002 respectively business tax credits company’s effective income tax rate varied us statutory federal income tax rate following international taxes 2004 reduced approximately 129 related changes income tax laws company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities fs42 4 note 17 taxes continued reported deferred tax balances composed following 2003 conformed 2004 presentation valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences benefit expected realized tax loss carryforwards exist many foreign jurisdictions whereas tax loss carryforwards expiration date others expire various times 2005 2011 foreign tax credit carryforwards 93 expire 2014 december 31 2004 2003 deferred taxes classified consolidated balance sheet follows company’s policy subsidiaries included us consolidated tax return record income tax expense though file separately parent recording adjustment income tax expense effects consolidation income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 10000 december 31 2004 significant majority amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings company anticipate incurring additional taxes remittances earnings indefinitely reinvested american jobs creation act 2004 october 2004 american jobs creation act 2004 passed law act provides deduction income qualified domestic refining upstream production activities phased 2005 2010 specific category income company expects net effect provision act result decrease federal effective tax rate 2005 2006 approximately 34 percent based current earnings levels long term company expects new deduction result decrease federal effective tax rate 32 percent category income based current earnings levels guidance fasb staff position fas 1091 “application fasb statement 109 ‘accounting income taxes’ tax deduction qualified production activities provided american jobs creation act 2004” tax deduction qualified production activities provided american jobs creation act 2004 treated “special deduction” described fas 109 special deduction effect deferred tax assets liabilities existing enactment date rather impact deduction reported period deduction claimed company’s tax return act also provides limited opportunity repatriate earnings outside united states special reduced tax rate low 525 percent early 2005 company process reviewing guidance irs issued january 13 2005 regarding provision also considering relevant information company anticipate major change plans repatriating earnings international operations provisions act taxes income follows includes taxes discontinued operations 3 5 7 2004 2003 2002 respectively fs43 notes consolidated financial statements millions dollars except pershare amounts note 18 shortterm debt weightedaverage interest rates december 31 2004 2003 198 percent 101 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 8 beginning page fs35 information concerning company’s debtrelated derivative activities december 31 2004 company 4735 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate bank prime rate amounts outstanding credit agreements 2004 yearend december 31 2004 2003 company classified 4735 4285 respectively shortterm debt longterm settlement obligations expected require use working capital 2005 company intent ability refinance debt longterm basis note 19 longterm debt chevrontexaco three “shelf” registrations file sec together would permit issuance 3800 debt securities pursuant rule 415 securities act 1933 company’s longterm debt outstanding yearend 2004 2003 follows guarantee esop debt assumed esop 1999 less 150 individually weightedaverage interest rates december 31 2004 consolidated longterm debt maturing december 31 2004 follows 2005 333 2006 149 2007 2178 2008 1061 2009 455 2009 1639 2004 company repaid 500 6625 percent notes 240 811 percent notes matured year repayments 2004 include 300 6 percent notes due june 2005 265 various philippine debt january 2005 company contributed 98 permit esop make principal payment 113 note 20 new accounting standards fasb interpretation 46 “consolidation variable interest entities” fin 46 fin 46 issued january 2003 established standards determining circumstances variable interest entity vie consolidated primary beneficiary fin 46 also requires disclosures vies company required consolidate significant variable interest december 2003 fasb issued fin 46r included amendments fin 46 also required application interpretation affected entities later march 31 2004 calendar year reporting companies prior requirement companies required apply interpretation specialpurpose entities december 31 2003 full adoption interpretation march 31 2004 including requirement relating specialpurpose entities impact company’s results operations financial position liquidity fasb staff position fas 1062 “accounting disclosure requirements related medicare prescription drug improvement modernization act 2003” fsp fas 1062 december 2003 medicare prescription drug improvement modernization act 2003 act became law act fs44 4 note 20 new accounting standards continued introduced prescription drug benefit medicare well federal subsidy sponsors retiree health care plans provide benefit least actuarially equivalent medicare part may 2004 fasb issued fsp fas 1062 one us subsidiary deemed least actuarially equivalent eligible federal subsidy effect company’s postretirement benefit obligation associated annual expense de minimis fasb statement 151 “inventory costs amendment arb 43 chapter 4” fas 151 november 2004 fasb issued fas 151 effective company january 1 2006 standard amends guidance accounting research bulletin arb 43 chapter 4 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs spoilage addition standard requires allocation fixed production overheads costs conversion based normal capacity production facilities company currently evaluating impact standard fasb statement 123r “sharebased payment” fas 123r december 2004 fasb issued fas 123r requires compensation costs relating sharebased payments recognized company’s financial statements company currently accounts payments recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” related interpretations company preparing implement standard effective july 1 2005 although transition method used adopt standard selected impact adoption expected minimal impact company’s results operations financial position liquidity refer note 1 beginning page fs30 company’s calculation pro forma impact net income fas 123 would similar fas 123r fasb statement 153 “exchanges nonmonetary assets amendment apb opinion 29” fas 153 december 2004 fasb issued fas 153 effective company assetexchange transactions beginning july 1 2005 apb 29 assets received certain types nonmonetary exchanges permitted recorded carrying value assets exchanged ie recorded carryover basis amended fas 153 assets received circumstances recorded instead fair values past chevrontexaco engaged large number nonmonetary asset exchanges significant amounts note 21 accounting suspended exploratory wells refer note 1 page fs30 section “properties plant equipment” discussion company’s accounting policy cost exploratory wells company’s suspended wells reviewed context quarterly basis sec issued comment letters 2004 february 2005 number companies oil gas industry related accounting suspended exploratory wells particularly suspended certain circumstances one year february 2005 fasb issued proposed fsp amend fas 19 “financial accounting reporting oil gas producing companies” provisions draft fsp exploratory well costs would continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b enterprise making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fsp provided number indicators needing present demonstrate sufficient progress made assessing reserves economic viability project company monitor continuing deliberations fasb matter possible implications company’s accounting policy amounts capitalized suspendedwell costs disclosures discussion address suggested draft fsp additional guidance issued sec february 2005 comment letter companies oil gas industry following table indicates changes company’s suspended exploratorywell costs three years ended december 31 2004 represents property sale 2003 retirement due legal settlement 2002 following table provides aging capitalized well costs based date drilling completed number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 671 suspended costs december 31 2004 approximately 290 related 30 wells areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned fs45 notes consolidated financial statements millions dollars except pershare amounts 4 note 21 accounting exploratory wells continued near future presence hydrocarbons already established activities process enable future decision project development balance related wells areas drilling way firmly planned near future 290 approximately 50 related well costs suspended one year less since drilling completed 240 related costs suspended one year since completion drilling 240 11 projects suspended one year since completion drilling activities associated assessing reserves projects’ economic viability included 75 discussions joint development operator adjacent field selection subsurface development plans frontendengineering design feed expected begin 2005 one project b 63 negotiations contractors feed negotiations potential customers natural gas two projects c 42 award contracts feed finalization fiscal issues host country one project 20 finalization commercial terms partners award detailed engineering design contracts expected end 2005 one project e 40 miscellaneous activities projects smaller amounts suspended progress made projects category decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects included 449 table preceding page yearend 2004 well costs 42 four projects 50 one project related costs suspended 2000 1998 respectively drilling associated project areas completed certain wells project areas may suspended prior years last drilling well costs 449 total associated projects drilling completed since 2000 fsp implemented similar draft issued february 2005 company believe would result immediate expensing significant amount suspendedwell costs however sec staff indicated generally would view conducting environmental engineering design studies reasonable support suspending costs beyond one year drilling complete restrictions included final fsp company may required expense significant amount wells found sufficient hydrocarbons justify completion producing wells projects company continued consider economically operationally viable final rule required company expense entire 240 beforetax carrying value 11 projects referenced suspended december 31 2004 one year completion drilling aftertax charge earnings would 150 note 22 employee benefit plans company definedbenefit pension plans many employees company typically funds definedbenefit plans funding required laws regulations united states includes qualified taxexempt plans subject employee retirement income security act erisa minimum funding standard company typically fund domestic nonqualified taxexempt pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs june 2004 company announced changes primary us postretirement benefit plan include limit future increases company contribution increase service points combination age years company service required receive full coverage plan’s prescription drug coverage retirees becoming secondary medicare part life insurance benefits paid company annual contributions based actual plan experience company uses measurement date december 31 value pension postretirement benefit plan obligations fs46 4 note 22 employee benefit plans continued status company’s pension postretirement benefit plans 2004 2003 follows benefits 2003 include 10 gain medicare part federal subsidy small subsidiary plan company recorded additional minimum liabilities 530 64 2004 us international plans respectively 1533 152 2003 us international plans respectively reflect amount unfunded accumulated benefit obligations longterm portion accrued benefits liability recorded “reserves employee benefit plans” shortterm portion reflected “accrued liabilities” “accumulated comprehensive income” includes deferred income taxes 181 21 2004 us international plans respectively 415 47 2003 us international plans respectively item presented net taxes consolidated statement stockholders’ equity accumulated benefit obligations us international pension plans 6117 2734 respectively december 31 2004 5374 2372 respectively december 31 2003 information pension plans accumulated benefit obligation excess plan assets december 31 2004 2003 fs47 notes consolidated financial statements millions dollars except pershare amounts 4 note 22 employee benefit plans continued components net periodic benefit cost 2004 2003 2002 assumptions following weighted average assumptions used determine benefit obligations net period benefit costs years ended december 31 discount rate expected rate return plan assets reviewed updated needed quarterly basis main us pension plan expected return plan assets company employs rigorous process determine estimates longterm rate return pension assets estimates primarily driven actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporating specific asset class risk factors asset allocations regularly updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 70 percent company’s pension plan assets december 31 2004 estimated longterm rate return us pension plan assets 78 percent yearend marketrelated value us pension plan assets used determination pension expense based market values preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility yet still contemporaneous end year plans outside us market value assets measurement date used calculating pension expense benefit assumptions effective january 1 2005 company amended main us postretirement medical plan limit future increases company contribution current retirees increase company contribution capped 4 percent year future retirees 4 percent cap effective retirement assumed health care cost trend rates start 106 percent 2004 gradually drop 48 percent 2010 beyond employee elects retire trend rates capped 4 percent measurement accumulated postretirement benefit obligation december 31 2003 assumed heath care cost trend rates start 84 percent 2003 gradually decline 45 percent 2007 beyond assumed health care costtrend rates significant effect amounts reported retiree health care costs change one percentage point assumed health care costtrend rates would following effects fs48 4 note 22 employee benefit plans continued plan assets investment strategy company’s pension plan weightedaverage asset allocation december 31 asset category follows pension plans invest primarily asset categories sufficient size liquidity cost efficiency permit investments reasonable size pension plans invest asset categories provide diversification benefits easily measured assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevrontexaco board directors established following approved asset allocation ranges equities 4070 percent fixed income 2065 percent real estate 015 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset category risk equities include investments company’s common stock amount 8 6 december 31 2004 2003 respectively “other” asset category includes investments private equity limited partnerships cash contributions benefit payments 2004 company contributed 1332 311 us international pension plans respectively 2005 company expects contributions approximately 250 150 us international pension plans respectively actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 220 2005 compared 199 2004 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevrontexaco certain subsidiaries participate chevrontexaco employee savings investment plan esip 2002 employees thrift plan texaco inc employees savings plan chevrontexaco global energy inc formerly caltex corporation stock plan chevrontexaco global energy inc employees thrift plan fuel marine marketing llc merged chevrontexaco esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop discussed total company matching contributions employee accounts within esip 139 136 2004 2003 2002 respectively cost reduced value shares released lesop totaling 138 23 73 2004 2003 2002 respectively remaining amounts totaling 1 113 63 2004 2003 2002 respectively represent open market purchases employee stock ownership plan within chevrontexaco employee savings investment plan esip employee stock ownership plan esop 1989 chevron established leveraged employee stock ownership plan lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted american institute certified public accountants aicpa statement position 936 “employers’ accounting employee stock ownership plans” company elected continue practices based aicpa 763 “accounting practices certain employee stock ownership plans” subsequent consensus eitf fasb debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total credits expenses recorded lesop 29 24 98 2004 2003 2002 respectively including 23 28 32 interest expense related lesop debt credit charge compensation expense 52 4 66 dividends paid lesop shares 52 61 49 used 2004 2003 2002 respectively service lesop debt included 2004 amount repayment debt entered 1999 pay interest esop debt interest expense debt recognized reported lesop interest expense 1999 addition company made contributions 2004 contributions 26 102 2003 fs49 notes consolidated financial statements millions dollars except pershare amounts 4 note 22 employee benefit plans continued 2002 respectively satisfy lesop debt service excess dividends received lesop january 2005 company contributed 98 permit lesop make 144 debt service payment included principal payment 113 shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2004 2003 follows 2003 share amounts restated reflect twoforone stock split effected 100 percent stock dividend 2004 benefit plan trust texaco established benefit plan trust funding obligations benefit plans yearend 2004 trust contained 142 million shares chevrontexaco treasury stock company intends continue pay obligations benefit plans trust sell shares use dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations management incentive plans chevrontexaco two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility plans expanded 2002 include former employees texaco caltex mip annual cash incentive plan links awards performance results prior year cash awards may deferred recipients conversion stock units investment fund alternatives awards ltip may take form limited stock options restricted stock units nonstock grants texaco also cash incentive program stock incentive plan sip included stock options restricted stock incentive awards executives directors key employees awards caltex ltip form performance units stock appreciation rights aggregate charges expense management incentive plans excluding expense related ltip sip stock options restricted stock awards discussed note 23 follows 214 148 48 2004 2003 2002 respectively included amount 2004 14 related stock appreciation rights incentive plans company program provides eligible employees covered mip ltip annual cash bonus company achieves certain financial safety goals charges program 339 151 158 2004 2003 2002 respectively note 23 stock options company applies apb opinion 25 related interpretations accounting stockbased compensation programs stockbased compensation expense credit recognized connection programs stock appreciation rights discussed 16 2 2004 2003 2002 respectively refer note 1 page fs30 pro forma effects net income earnings per share company applied fairvaluerecognition provisions fas 123 discussion references share price number shares adjusted twoforone stock split september 2004 discussed note 3 page fs33 broadbased employee stock options 1998 chevron granted eligible employees options varied 200 600 shares stock equivalents dependent employee’s salary job grade options vested two years february 2000 expire february 2008 options 9641600 shares awarded exercise price 3815625 per share outstanding option shares 4018350 end 2002 2003 exercises 23260 forfeitures 122100 reduced outstanding option shares 3872990 end year 2004 exercises 1720946 forfeitures 42540 reduced outstanding option shares 2109504 end year company recorded expense credit 2 options 2004 2003 2002 respectively fair value option share date grant fas 123 estimated 954 using average results blackscholes models preceding 10 years 10year averages assumption used blackscholes models riskfree interest rate 70 percent dividend yield 42 percent expected life seven years volatility 247 percent longterm incentive plan stock options granted ltip extend 10 years date grant effective options granted june 2002 onethird options vest first second third anniversaries date grant prior change options granted chevron vested one year date grant whereas options granted texaco sip vested twoyear period rate 50 percent year 10year period april 2004 160 million shares may issued plan 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient provision replaced formula restricted annual awards one percent shares outstanding beginning year counted 160 millionshare maximum shares issued result exercise options granted change formula 2004 closing merger october 2001 outstanding options granted texaco sip converted chevrontexaco options merger exchange rate 077 options retained provision restored options feature enables participant exercises stock option exchanging previously acquired common stock shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price fair market value common stock day restored option granted restricted shares fs50 4 note 23 stock options continued granted former texaco plan contained performance element satisfied order specified portion shares vest upon merger restricted shares became vested converted chevrontexaco shares merger exchange ratio 077 apart restored options awards may granted former texaco plans amount plans charged compensation expense 2004 2003 2002 fair market value stock option granted estimated date grant fas 123 using blackscholes optionpricing model following weightedaverage assumptions blackscholes weightedaverage fair value chevrontexaco options granted 2004 2003 2002 714 551 930 per share respectively weightedaverage fair value sip restored options granted 2004 2003 2002 400 403 515 per share respectively summary status stock options awarded company’s ltip well former texaco plans 2004 2003 2002 follows following table summarizes information stock options outstanding including former texaco plans december 31 2004 note 24 contingencies commitments income taxes company estimates income tax expense liabilities annually liabilities generally finalized individual taxing authorities several years end annual period income taxes estimated us federal income tax liabilities settled 1996 chevrontexaco formerly chevron corporation 1997 chevrontexaco global energy inc formerly caltex 1991 texaco inc california franchise tax liabilities settled 1991 chevron 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees december 31 2004 company subsidiaries provided either directly indirectly guarantees 963 notes contractual obligations affiliated companies 130 third parties described major category amounts carried liabilities company’s obligations guarantees 963 guarantees provided affiliates 774 relate borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects approximately 90 percent amounts guaranteed expire 2009 remaining guarantees expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees 189 balance 963 represents obligations connection pricing power purchase agreements certain company’s cogeneration affiliates terms guarantees company may required make payments certain conditions affiliates perform agreements provisions recourse third parties assets held collateral pricing guarantees 130 provided third parties including approximately 40 construction loans host governments certain company’s international upstream operations remaining guarantees 90 provided fs51 notes consolidated financial statements millions dollars except pershare amounts 4 note 24 contingencies commitments continued principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities 70 percent total amounts guaranteed expire 2009 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 70 guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets december 31 2004 chevrontexaco also outstanding guarantees approximately 215 equilon debt leases following february 2002 disposition interest equilon company received indemnification shell oil company claims arising guarantees company recorded liability guarantees approximately 45 percent amounts guaranteed expire 2009 guarantees remaining amounts expiring 2019 indemnifications company provided certain indemnities contingent liabilities equilon motiva shell oil company shell saudi refining inc connection february 2002 sale company’s interests investments indemnities cover certain contingent liabilities including associated unocal patent litigation company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 end 2004 company paid approximately 28 contingencies agreed pay approximately 10 additional award arbitration subject minor adjustments yet resolved company may receive additional requests indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods texaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon indemnities must asserted either early february 2007 later february 2009 claims relating motiva must asserted later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident securitization company securitizes certain retail trade accounts receivable downstream business use qualifying spes december 31 2004 approximately 1200 representing 10 percent chevrontexaco’s total current accounts receivables balance securitized chevrontexaco’s total estimated financial exposure securitizations december 31 2004 approximately 50 arrangements effect accelerating chevrontexaco’s collection securitized amounts event spes experience major defaults collection receivables chevrontexaco believes would loss exposure connected thirdparty investments securitizations longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2005 1600 2006 1700 2007 1600 2008 1500 2009 1500 2010 2300 total payments agreements approximately 1600 2004 1400 2003 1200 2002 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2005 1200 2006 1200 2007 1300 2008 1300 2009 1300 additionally 2004 company entered 20year agreement acquire regasification capacity sabine pass lng terminal payments 1200 20year period expected commence 2010 minority interests company commitments approximately 172 related minority interests subsidiary companies texaco capital llc wholly owned financial subsidiary issued deferred preferred shares series c december 1995 february 2005 company redeemed current obligations related minority interests approximately 140 environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries oil fields service stations terminals land development areas whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable fs52 4 note 24 contingencies commitments continued amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevrontexaco’s environmental reserve december 31 2004 1047 company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2004 recorded liability material company’s financial position results operations liquidity included yearend 2004 balance 107 related sites chevrontexaco identified us environmental protection agency regulatory agencies provisions federal superfund law analogous state laws “potentially responsible party” otherwise involved remediation remaining yearend 2004 environmental reserves balance 940 712 related 2000 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 228 associated various sites international downstream 111 upstream 69 chemicals 48 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants global operations chevrontexaco affiliates conduct business activities approximately 180 countries areas company affiliates significant operations include united states canada australia united kingdom norway denmark france partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad south africa indonesia philippines singapore china thailand venezuela argentina brazil colombia trinidad tobago south korea company’s cpc affiliate operates russia kazakhstan company’s tco affiliate operates kazakhstan company’s cpchem affiliate manufactures markets wide range petrochemicals worldwide basis manufacturing facilities united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken host governments increase public ownership company’s partially wholly owned businesses assets impose additional taxes royalties company’s operations certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest acts violence strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevrontexaco’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevrontexaco currently estimates maximum possible net beforetax liability approximately 200 time possible maximum net amount could owed chevrontexaco estimated 50 timing settlement exact amount within range estimates uncertain contingencies chevrontexaco receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 25 fas 143 asset retirement obligations company adopted financial accounting standards board statement 143 “accounting asset retirement obligations” fas 143 effective january 1 2003 accounting standard applies fair value liability asset retirement obligation recorded legal obligation associated retirement tangible longlived asset liability reasonably estimated obligations associated retirement assets require recognition certain circumstances 1 present value liability offsetting asset aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates fas 143 primarily affects company’s accounting crude oil natural gas producing assets differs several respects previous accounting fas 19 “financial accounting reporting oil gas producing companies” chevrontexaco corporation 2004 annual report 53 fs53 notes consolidated financial statements millions dollars except pershare amounts note 25 fas 143 asset retirement obligations continued first quarter 2003 company recorded net aftertax charge 200 cumulative effect adoption fas 143 including company’s share amounts attributable equity affiliates cumulativeeffect adjustment also increased following balance sheet categories “properties plant equipment” 2568 “accrued liabilities” 115 “deferred credits noncurrent obligations” 2674 “noncurrent deferred income taxes” decreased 21 upon adoption significant asset retirement obligations associated legal obligations retire refining marketing transportation downstream chemical longlived assets generally recognized indeterminate settlement dates asset retirements prevented estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation cumulativeeffect net charge effect new accounting standard net income 2003 materially different result would fas 19 accounting included “depreciation depletion amortization” 52 related depreciation aro asset 132 related accretion aro liability following table illustrates company’s net income extraordinary items net income related pershare amounts would provisions fas 143 applied retroactively excludes cumulativeeffect charge 200 009 per basic diluted share adoption fas 143 includes benefit 5 represents reversal fas 19 depreciation related abandonment offset partially pro forma expenses depreciation accretion aro asset liability net tax de minimis effect net income per basic diluted share reported net income extraordinary items also 357 per basic diluted shares 2003 053 per basic diluted shares 2002 reported net income 348 per basic diluted shares 2003 053 per basic diluted shares 2002 prior implementation fas 143 company recorded provision abandonment part “accumulated depreciation depletion amortization” upon implementation fas 143 provision abandonment reversed aro liability recorded amount abandonment reserve end 2002 2263 2002 proforma aro liability january 1 december 31 2792 2797 respectively following table indicates changes company’s beforetax asset retirement obligations 2004 2003 includes cumulative effect accounting change note 26 earnings per share basic earnings per share eps based upon net income less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevrontexaco stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock fs54 4 note 26 earnings per share continued options awarded company’s stock option programs see note 23 “stock options” beginning page fs50 following table sets forth computation basic diluted eps 2003 amount company’s share capital stock transaction dynegy affiliate applicable accounting rules recorded directly retained earnings includes net loss 200 adoption fas 143 net gain 4 company’s share dynegy’s cumulative effect adoption eitf 023 share amounts period reflect twoforone stock split effected 100 percent stock dividend september 2004 fs55 page intentionally left blank fs56 fiveyear financial summary unaudited pershare amounts periods reflect twoforone stock split effected 100 percent stock dividend september 2004 amount 2003 includes benefit 008 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly retained earnings included net income period chevron corporation dividend premerger supplemental information oil gas producing activities unaudited accordance statement fas 69 “disclosures oil gas producing activities” section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves fs57 supplemental information oil gas producing activities continued changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo sold 2004 asiapacific geographic area includes activities principally australia china kazakhstan partitioned neutral zone kuwait saudi arabia papua new guinea sold 2003 philippines thailand international “other” geographic category includes activities united kingdom canada denmark netherlands norway trinidad tobago colombia venezuela brazil argentina countries amounts shown affiliated companies chevrontexaco’s 50 percent equity share tco exploration production partnership operating republic kazakhstan 30 percent equity share hamaca exploration production partnership operating venezuela amounts tables exclude cumulative effect adjustment adoption fas 143 “asset retirement obligations” refer note 25 page fs53 table costs incurred exploration property acquisitions development1 includes costs incurred whether capitalized expensed excludes general support equipment expenditures see note 25 fas 143 “asset retirement obligations” page fs53 includes wells equipment facilities associated proved reserves include properties acquired property exchanges includes 63 costs incurred prior assignment proved reserves fs58 table ii capitalized costs related oil gas producing activities1 includes assets held sale see note 25 fas 143 “asset retirement obligations” page fs53 2003 2002 reclassified conform 2004 presentation fs59 supplemental information oil gas producing activities continued table ii capitalized costs related oil gas producing activities1 continued includes assets held sale 2003 2002 reclassified conform 2004 presentation fs60 table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2004 2003 2002 shown following table net income exploration production activities reported page fs36 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs36 value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations see note 25 page fs53 fas 143 “asset retirement obligations” includes net sulfur income foreign currency transaction gains losses certain significant impairment writedowns miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified mda pages fs6 fs8 2003 includes certain reclassifications conform 2004 presentation fs61 supplemental information oil gas producing activities continued table iii results operations oil gas producing activities1 continued value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2002 includes certain reclassifications conform 2004 presentation see note 25 page fs53 fas 143 “asset retirement obligations” includes net sulfur income foreign currency transaction gains losses certain significant impairment writedowns miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified mda pages fs6 fs8 table iv results operations oil gas producing activities unit prices costs12 value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel conformed 2004 presentation exclude taxes fs62 table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec standards demonstrate high probability produced proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods proved reserves include additional quantities may eventually result extensions currently proved areas applying secondary tertiary recovery processes yet tested determined economic due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists reservoir engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly executive vice president responsible company’s worldwide exploration production activities rac members knowledgeable sec guidelines proved reserves classification rac coordinates activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities provide independent reviews business units’ recommended reserve changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also presented discussed board directors major reservesrelated issues discussed board necessary throughout year rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination proved reserve records documentation alignment corporate reserves manual reserve quantities december 31 2004 total oilequivalent reserves company’s consolidated operations 82 billion barrels refer page e12 definition oilequivalent reserves nearly 30 percent united states 10 percent indonesia company’s interests equity affiliates oilequivalent reserves 31 billion barrels nearly 85 percent associated company’s 50 percent ownership tco fewer 20 individual properties company’s portfolio assets contained 1 percent 4 percent company’s oilequivalent proved reserves aggregate accounted 35 percent company’s proved reserves total properties geographically dispersed located united states south america europe west africa middle east asiapacific region united states total oilequivalent reserves yearend 2004 24 billion barrels amount 45 percent 20 percent 35 percent located california gulf mexico us areas respectively california liquids reserves represented 95 percent total classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region liquids represented approximately 60 percent total oilequivalent reserves production operations mostly offshore result also capital intensive costs include investments wells production platforms facilities gathering lines storage facilities us areas reserves split equally liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection chevrontexaco operates boscan field venezuela service agreement recorded reserve quantities operation pattern net reserve changes shown following tables three years ending december 31 2004 necessarily indicative future trends company’s ability add proved reserves affected among things matters outside company’s control delays government permitting partner approvals development plans declines oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved underground oil natural gas reserves changes thereto years 2002 2003 2004 shown following tables fs63 supplemental information oil gas producing activities continued table v reserve quantity information continued net proved reserves crude oil condensate natural gas liquids includes reserves acquired property exchanges includes reserves disposed property exchanges net reserve changes excluding production 2004 consist 5 million barrels developed reserves 209 million barrels undeveloped reserves consolidated companies 315 million barrels developed reserves 111 million barrels undeveloped reserves affiliated companies 2004 percentages undeveloped reserves december 31 2003 transferred developed reserves 13 percent 15 percent consolidated companies affiliated companies respectively information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevrontexaco significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevrontexaco views reserves development integral part total upstream operations however sec regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 167 million barrels december 31 2004 production began late 2002 oil sands reserves considered standardized measure discounted future net cash flows conventional oil gas reserves found page fs67 noteworthy amounts categories provedreserves changes 2002 2004 table discussed revisions 2002 net revisions reduced liquids volumes worldwide 49 million barrels consolidated companies international areas accounted net increase 67 million barrels largest upward net revision internationally 161 million barrels contract extension angola largest negative net revision 155 million barrels indonesia mainly effect higher yearend prices calculation reserves associated costoil recovery productionsharing contract united states total downward net revision 116 million barrels across many fields geographic sections 199millionbarrel increase tco affiliate associated project approval expand gas processing facilities 2003 net revisions increased reserves 57 million barrels consolidated companies whereas net us reserve changes minimal international volumes increased 66 million barrels largest increase kazakhstan asiapacific area based updated geologic model one field 200millionbarrel increase tco based updated model reservoir well performance fs64 table v reserve quantity information continued 2004 net revisions decreased reserves 218 million barrels consolidated companies increased reserves affiliates 204 million barrels consolidated companies decrease composed 161 million barrels international areas 57 million barrels united states largest downward revision internationally 70 million barrels africa one field angola accounted majority net decline changes made oilinplace estimates based reservoir performance data one field asiapacific area essentially accounted 43millionbarrel downward revision region revision associated reduced well performance part 36millionbarrel net downward revision indonesia associated effect higher yearend prices calculation reserves costoil recovery productionsharing contract united states 68millionbarrel net downward revision gulf mexico area across several fields based mainly reservoir analyses assessments well performance affiliated companies 206millionbarrel increase tco based updated assessment reservoir performance tengiz field partially offsetting net increase downward effect higher yearend prices variable royaltyrate calculation downward revisions also occurred geographic areas effect higher yearend prices various productionsharing terms variable royalty calculations improved recovery 2002 improved recovery increased liquids volumes worldwide 239 million barrels consolidated companies largest increase 99 million barrels occurred united states primarily california region due pattern modifications injector conversions infill drilling large heavy oil field thermal recovery extensions discoveries 2002 extensions discoveries increased liquids volumes worldwide 442 million barrels consolidated companies largest increase 301 million barrels africa principally 172 million barrels reflecting project sanction recent discovery nigeria 96 million barrels associated approval several development projects angola net proved reserves natural gas includes reserves acquired property exchanges includes reserves disposed property exchanges net reserve changes excluding production 2004 consist 543 billion cubic feet developed reserves 490 billion cubic feet undeveloped reserves consolidated companies 883 billion cubic feet developed reserves 103 billion cubic feet undeveloped reserves affiliated companies 2004 percentages undeveloped reserves december 31 2003 transferred developed reserves 4 percent 6 percent consolidated companies affiliated companies respectively fs65 supplemental information oil gas producing activities continued table v reserve quantity information continued sales 2004 sales liquids volumes reduced reserves consolidated companies 179 million barrels sales totaled 130 million barrels united states 33 million barrels “other” international region sales “other” region united states totaled 103 millions barrels two fields accounting approximately onehalf volume 27 million barrels sold gulf mexico reflect sale number shelf properties “other” international sales include disposal western canada properties several fields united kingdom sales associated company’s program dispose assets deemed nonstrategic portfolio producing properties noteworthy amounts categories provedreserves changes 2002 2004 table page fs65 discussed revisions 2002 reserves revised upward net 161 billion cubic feet bcf consolidated companies increases 759 bcf internationally partially offset net downward revisions 598 bcf united states internationally majority 277 bcf net upward revision africa associated primarily performance assessment several fields multifield gas development project increase 375 bcf asiapacific region included effect securing contract supply lng china markets company producing operations australia united states onefourth 598 bcf net downward revision associated two fields midcontinent region based updated assessment production performance changes operating conditions wells remaining negative revision associated reviews performance many fields tco affiliate kazakhstan 293 bcf increase related mainly project approval expand gas processing facilities 2003 revisions accounted net increase 1627 bcf consolidated companies net increases 2233 bcf internationally partially offset net downward revisions 606 bcf united states internationally net 879 bcf increase asiapacific region related primarily australia kazakhstan australia increase associated mainly change probabilistic method aggregating reserves multiple fields produced common offshore infrastructure single lng plant increase kazakhstan related updated geologic model one field higher gas sales thirdparty processing plant net 976 bcf increase “other” international area mainly result operating contract extensions two fields south america united states onethird net 606 bcf negative revision related two coal bed methane fields midcontinent region based performance data producing wells downward revisions balance writedown associated several fields based assessments well performance data 2004 revisions increased reserves consolidated companies net 248 bcf composed increases 928 bcf internationally decreases 680 bcf united states internationally half 346 bcf increase africa related properties nigeria changes associated well performance reviews development drilling lease fuel calculations 236 bcf addition asiapacific region related primarily reservoir analysis single field 325 bcf “other” international area related new gas sales contract trinidad tobago united states net 391 bcf downward revision gulf mexico related wellperformance reviews technical analyses several fields net 316 bcf negative revision “other” us area related two coal bed methane fields midcontinent region associated wells’ performance 963 bcf increase tco connected updated analyses reservoir performance processing plant yields extensions discoveries 2002 consolidated companies increased reserves 892 bcf including 395 bcf united states 227 bcf asiapacific region united states 229 bcf added gulf mexico 161 bcf “other” region primarily due drilling activities addition asiapacific resulted gas supply contract australia enabled booking previous discovery 2003 extensions discoveries accounted increase 526 bcf consolidated companies reflecting 388 bcf increase united states 270 bcf added gulf mexico 118 bcf “other” region gulf mexico increase includes discoveries several offshore louisiana fields large number fields texas louisiana states accounting increase “other” 2004 extensions discoveries accounted increase 214 bcf reflecting increase united states 144 bcf 89 bcf added “other” region 54 bcf added gulf mexico drilling activities large number fields sales 2004 sales consolidated companies totaled 547 bcf total 436 bcf united states 111 bcf “other” international region united states “other” region sales accounted 289 bcf reflecting disposal large number smaller properties including coal bed methane field gulf mexico sales 147 bcf reflected sale shelf properties four fields accounting onethird total sales “other” international region reflected disposition properties western canada united kingdom fs66 table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows 2002 includes certain reclassifications conform 2004 presentation fs67 supplemental information oil gas producing activities continued table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” 2003 2002 conformed 2004 presentation fs68 exhibit index e1 filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevrontexaco corporation 6001 bollinger canyon road san ramon california 94583 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 40 annual report form 10k schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 annual report form 10k lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 16 consolidated financial statements beginning page fs47 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 1st day march 2006 chevron corporation david j o’reilly david j o’reilly chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 1st day march 2006 index management’s discussion analysis consolidated financial statements supplementary data fs1 management’s discussion analysis financial condition results operations key financial results income continuing operations major operating area net income 2003 included 196 million charge cumulative effect changes accounting principle primary change related company’s adoption financial accounting standards board statement 143 “accounting asset retirement obligations” discussed note 24 consolidated financial statements net income 2004 included gains approximately 12 billion relating sale nonstrategic upstream properties refer also “results operations” section beginning page fs7 detailed discussion financial results major operating area three years ending december 31 2005 business environment outlook company’s current future earnings depend largely profitability upstream exploration production downstream refining marketing transportation business segments single biggest factor affects results operations segments movement price crude oil downstream business crude oil largest cost component refined products overall earnings trends typically less affected results company’s chemical business activities investments earnings company period may also affected events transactions infrequent andor unusual nature company’s longterm competitive position particularly given capitalintensive commoditybased nature industry closely associated company’s ability invest projects provide adequate financial returns manage operating expenses effectively creating maintaining inventory projects depends many factors including obtaining rights explore crude oil natural gas developing producing hydrocarbons promising areas drilling successfully bringing longlead time capitalintensive projects completion budget schedule operating mature upstream properties efficiently profitably company also continuously evaluates opportunities dispose assets key providing longterm value acquire assets operations complementary asset base help augment company’s growth assetdisposition restructuring may occur future periods could result significant gains losses august 2005 company acquired unocal corporation unocal independent oil gas exploration production company aggregate purchase price 173 billion included 75 billion cash approximately 169 million shares chevron common stock valued 96 billion 02 billion stock options approximately 5 million shares mergerrelated fees refer note 2 beginning page fs36 discussion unocal acquisition comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions may caused military conflicts civil unrest political uncertainty fs2 moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments attempts manage risks operating facilities business price levels capitalized costs operating expenses associated efficient production crude oil natural gas also subject external factors beyond company’s control external factors include general level inflation also prices charged industry’s product serviceproviders affected volatility industry’s supply demand conditions products services oil gas industry worldwide experienced significant price increases items 2005 expected continue 2006 capitalized costs operating expenses also affected uninsured damages production facilities caused severe weather civil unrest industry price levels crude oil continued upward trend 2005 spot price west texas intermediate wti crude oil one benchmark crudes averaged 57 per barrel 2005 increase approximately 16 per barrel 2004 average price wti spot price first two months 2006 averaged 64 per barrel rise crude oil prices reflects among things increasing demand growing economies heightened level geopolitical uncertainty areas world supply concerns key producing regions including production gulf mexico partially shut following hurricanes case 2004 differential prices highquality lightsweet crude oils us benchmark wti heavier crudes unusually wide 2005 chevron produces heavy crude oil california chad indonesia partitioned neutral zone saudi arabia kuwait venezuela including volumes produced operating service agreement certain fields angola china united kingdom north sea price heavier crudes dampened ample supply together lower relative demand number refineries able process lowerquality feedstock lightproduct fuels ie motor gasoline jet fuel aviation gasoline diesel fuel demand heavy crude reduced late 2005 refining capacity along us gulf coast interrupted hurricanes price higherquality light oil hand remained high demand light products manufactured refinery light oil robust worldwide natural gas prices particularly united states also trended upward 2005 full year us benchmark prices henry hub averaged 8 per thousand cubic feet mcf compared 6 2004 henry hub spot prices peaked december 2005 14 supplies early winter heating season reduced production shut following hurricanes katrina rita midfebruary 2006 prices moved downward 8 per mcf fluctuations price natural gas united states closely associated volumes produced north america inventory underground storage meet customer demand contrast united states certain regions world company operates different supply demand regulatory circumstances typically resulting significantly lower average sales prices company’s production natural gas refer page fs12 company’s average natural gas prices us international regions additionally excess supply conditions exist certain parts world cannot easily serve mitigate relatively highprice conditions united states markets lack infrastructure difficulties transporting natural gas help address fs3 management’s discussion analysis financial condition results operations regional imbalance supply demand natural gas chevron planning increased investments longterm projects areas excess supply install infrastructure produce liquefy natural gas transport tanker along investments commitments regasify product markets demand strong supplies plentiful due significance overall investment longterm projects natural gas sales prices areas excess supply natural gas transferred companyowned thirdparty processing facility expected remain well sales prices natural gas produced much nearer areas high demand transported existing natural gas pipeline networks united states longerterm trends earnings upstream segment also function factors besides price fluctuations including changes company’s crude oil natural gas production levels company’s ability find acquire efficiently produce crude oil natural gas reserves company’s overall capital investment upstream businesses particularly outside united states investments upstream projects generally made well advance start associated crude oil natural gas production chevron’s worldwide net oilequivalent production approximately 25 million barrels per day 2005 including volumes produced oil sands production operating service agreement remained essentially unchanged 2004 however production fourth quarter 2005 nearly 27 million barrels per day reflecting benefit volumes associated properties acquired unocal effect partially offset production shut result hurricanes gulf mexico prior hurricanes august september 2005 oilequivalent production gulf mexico approximately 300000 barrels per day 2006 production projected average approximately 200000 barrels per day normal field declines expected exceed production restored wells shut damaged hurricanes production result drilling new wells area approximately 20000 net oilequivalent barrels daily production expected sufficiently economic restore refer also pages 11 24 additional discussion detail production volumes worldwide company estimates oilequivalent production 2006 average 27 million 28 million barrels per day however future estimates subject many uncertainties including quotas may imposed opec price effect production volumes calculated costrecovery variableroyalty provisions certain contracts severe weather potential local civil unrest changing geopolitics could cause production disruptions approximately 26 percent company’s net oilequivalent production 2005 including net barrels oil sands production operating service agreement occurred opecmember countries indonesia nigeria venezuela partitioned neutral zone saudi arabia kuwait although company’s production level 2005 constrained areas opec quotas future production could affected opecimposed limitations future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production refer pages fs5 fs7 discussion company’s major upstream projects certain onshore areas nigeria approximately 45000 barrels per day company’s net production capacity shut 2003 civil unrest damage production facilities company adopted phased plan restore operations onethird volumes returned production early 2006 refer pages fs7 fs9 additional discussion company’s upstream operations downstream refining marketing transportation earnings closely tied global regional supply demand refined products associated effects industry refining marketing margins company’s core marketing areas west coast north america us gulf coast latin america asia subsaharan africa 2005 industry refining margins improved prior year reflecting strong demand refined products however marketing margins highly influenced regional market conditions mixed many regions experienced stronger marketing margins generally lower united states europe retail prices keep pace rising crude oil spot product prices industry margins future may volatile due primarily changes price crude oil used refinery feedstock disruptions refineries resulting maintenance programs mishaps levels inventory demand refined products influences company’s profitability segment include operating efficiencies expenses refinery network including effects downtime due planned unplanned maintenance refinery upgrade projects operating incidents level operating expenses downstream segment also affected volatility charter expenses company’s shipping operations driven industry’s demand crude oil product tankers factors affecting company’s downstream profitability beyond fs4 company’s control include general level inflation energy costs operate refinery network refer pages fs9 fs10 additional discussion company’s downstream operations chemicals earnings petrochemicals business closely tied global chemical demand industry inventory levels plant capacity utilization additionally feedstock fuel costs tend follow crude oil natural gas price movements influence earnings segment refer page fs10 additional discussion chemical earnings company’s oronite subsidiary 50 percentowned chevron phillips chemical company llc operating developments key operating developments events 2005 early 2006 included upstream worldwide proved reserves result acquisition unocal august 2005 company increased net oilequivalent proved reserves approximately 15 billion barrels significant unproved volumes oil gas also added company’s resource base refer pages fs70 fs75 detailed discussion proved reserve changes 2005 note 2 beginning page fs36 discussion unocal acquisition north america september 2005 company sold northrock resources limited wholly owned canadian subsidiary unocal 17 billion disposition consistent chevron’s divestiture 2004 conventional crude oil natural gas business western canada enabling company’s continued focus profitable growth production crude oil natural gas strategically important core areas operation late 2005 company began construction floating production facility installed tahiti field deepwater gulf mexico tahiti anticipated maximum total daily production 125000 barrels per day crude oil 70 million cubic feet natural gas chevron operator holds 58 percent working interest project developed phases expected come onto production 2008 period decision made proceed development blind faith field also deepwater gulf mexico first production expected 2008 initial total daily output estimated 30000 barrels crude oil 30 million cubic feet natural gas chevron operator holds 625 percent working interest project late 2005 company drilled deepwater crude oil discoveries gulf mexico 60 percentowned operated big foot prospect walker ridge block 29 25 percentowned nonoperated knotty head prospect located green canyon block 512 additional appraisal activity continued 2006 locations angola early 2006 first oil produced 31 percentinterest deepwater belize field block 14 offshore angola benguela belize lobito tomboco fields form project developed two phases maximum total production phases project anticipated reach 200000 barrels crude oil per day 2008 australia mid2005 company exploration rights four deepwater blocks northern carnarvon basin offshore western australia early 2006 company awarded rights another block carnarvon basin blocks located area significant natural gas potential near chevronled gorgon project chevron holds 50 percent operated interest blocks kazakhstan late 2005 company’s 50 percentowned tengizchevroil tco affiliate awarded commercial contracts enable increased crudeoil exports southern route across caspian sea southern route provide additional export capacity tco’s increased production caspian pipeline consortium pipeline expanded additional crude oil production tco result major facilitiesexpansion projects constructed total cost approximately 55 billion third quarter 2007 tco’s crude production capacity projected increase current capacity 300000 barrels per day 460000 550000 nigeria early 2005 construction contract awarded 11 billion floating production storage offloading fpso vessel used agbami field construction contract key milestone development 68 percentowned agbami field scheduled come online 2008 estimated maximum total daily production 250000 barrels crude oil nigeria são tomé e príncipe joint development zone jdz early 2005 company signed productionsharing contract block 1 nigeria são tomé e príncipe jdz chevron operator 51 percent interest block drilling first exploration well way latefebruary 2006 venezuela june 2005 company discovered natural gas block 3 plataforma deltana offshore venezuela site proximity loran natural gas field block 2 provides sufficient resources detailed evaluation venezuela’s first liquefied natural gas lng train fs5 management’s discussion analysis financial condition results operations third quarter 2005 company awarded exploration license cardon iii block offshore western venezuela block region natural gas potential north maracaibo producing area december 2005 chevron signed transition agreement petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company convert contracts boscan ll652 operating service agreements empresa mixta em jointstock contractual structure pdvsa majority shareholder negotiation ownership format final em structure conducted 2006 possible financial implications em structure uncertain expected material effect company’s consolidated financial position liquidity global natural gas projects angola company awarded contracts april 2005 frontend engineering design studies multibilliondollar onshore lng project located northern angola project designed help reduce flaring natural gas represents major step toward commercialization angola’s vast natural gas resources company 36 percent ownership interest angola lng project colead development angolan government’s national oil company construction expected begin 2007 april 2005 company reached agreement jointventure participants greater gorgon area offshore western australia enable combined development natural gas gorgon nearby gas fields one project company significant holder gas resources area approximate 50 percent ownership interest across greater gorgon area june 2005 company announced decision move australian greater gorgon gas development project frontend engineering design phase twotrain 10 million metric tons per year lng facility potential domestic gas plant barrow island targeting initial production 2010 chevron operator 50 percent ownership interest licenses greater gorgon area fourth quarter 2005 company signed heads agreement hoa first sale lng gorgon project japan world’s largest lng market preliminary agreement signed chevron australia pty ltd tokyo gas co ltd major japanese utility company purchase 12 million metric tons per year gorgon lng 25 years two additional hoas later signed chevron australia pty ltd chubu electric co inc osaka gas co ltd companies japan preliminary agreement purchase 15 million metric tons per year gorgon lng 25 years commencing 2010 2011 respectively company partners north west shelf nws venture agreed mid2005 expand project’s onshore lng facilities western australia chevron holds onesixth interest nws venture 15 billion project includes adding fifth train increase lng export capacity 4 million metric tons per year approximately 16 million metric tons per year startup expected 2008 december 2005 nws joint venture participants approved development angel natural gas field provide natural gas supply train 5 expansion nigeria company awarded 17 billion contract april 2005 engineering procurement construction escravos gastoliquids project plant construction began 2005 including major equipment fabrication site preparation third quarter 2005 installation began 350mile main offshore segment west african gas pipeline provide natural gas markets ghana togo benin connecting existing onshore pipeline nigeria pipeline capacity approximately 475 million cubic feet per day help reduction flaring natural gas company’s areas operation russia oao gazprom included chevron list companies could continue commercial technical discussions concerning development related commercial activities shtokmanovskoye field discussions way early 2006 timing gazprom’s selection company companies participate field development uncertain shtokmanovskoye large natural gas field offshore russia barents sea oao gazprom russia’s largest natural gas producer united states chevron completed acquisition remaining 40 percent interest bridgeline holdings lp august 2005 bridgeline manages operates 1000 miles pipeline 12 billion cubic feet natural gas storage capacity southern louisiana third quarter 2005 company filed application federal energy regulatory commission construct operate natural gas import terminal casotte landing site adjacent chevron’s refinery pascagoula mississippi terminal designed initially process 13 billion cubic feet natural gas per day imported lng fourth quarter 2005 company committed pipeline additional lng terminal capacity sabine pass area louisiana first commitment 1 billion cubic feet per day pipeline capacity new pipeline additional interconnect capacity existing pipeline company also exercised option increase capacity fs6 sabine pass lng terminal 700 million 1 billion cubic feet per day downstream united states company initiated project increase capacity pascagoula mississippi refinery’s fluid catalytic cracking unit approximately 25 percent current capacity 63000 barrels per day project designed enable refinery increase production gasoline light products expected completed late 2006 south korea company’s 50 percentowned gs caltex affiliate announced major upgrade project 650000barrelperday yeosu refining complex estimated total cost 15 billion facilities increase yield highvalue refined products reduce feedstock costs processing heavy crude oil startup expected end 2007 chemicals qatar company’s 50 percentowned affiliate chevron phillips chemical company llc cpchem obtained approvals completed financial closing qchem ii complex located next existing qchem complex mesaieed qatar qchem ii complex include 350000metrictonperyear polyethylene plant 345000metrictonperyear normal alpha olefins plant project also includes separate joint venture develop 1300000metrictonperyear ethylene cracker qatar’s ras laffan industrial city cpchem partners expect startup cracker derivatives plants late 2008 cpchem owns 49 percent interest qchem ii common stock dividends stock repurchase program april 2005 company increased quarterly common stock dividend 125 percent 045 per share company completed authorized 5 billion stock buybacks november 2005 repurchase program initiated april 2004 upon completion program company authorized acquisition 5 billion additional shares period three years purchases authorization totaled 481 million midfebruary 2006 results operations major operating areas following section presents results operations company’s business segments upstream downstream chemicals well “all other” includes mining operations coal minerals power generation businesses various companies departments managed corporate level income also presented us international geographic areas upstream downstream business segments refer note 8 beginning page fs40 discussion company’s “reportable segments” defined fas 131 “disclosures segments enterprise related information” aid understanding changes income periods discussion applicable two parts first underlying trends second specialitem gains charges special items identified separately nature amount also help discern underlying trends company’s businesses section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream exploration production us upstream income nearly 42 billion 2005 increased 230 million amount 2004 included net specialitem benefits discussed 300 million higher prices crude oil natural gas 2005 earnings former unocal operations contributed approximately 2 billion increase periods approximately 90 percent amount related effects higher prices heritagechevron production benefits partially offset adverse effects lower production discussed higher operating expenses higher depreciation expense associated heritagechevron properties income 39 billion 2004 11 billion higher 28 billion recorded 2003 increase 725 million resulted difference effect earnings respective periods special items cumulativeeffect charges recorded 2003 implementation new accounting standard refer note 24 beginning page fs59 discussion fas 143 “accounting asset retirement obligations” balance increase 2003 2004 composed 1 billion benefit higher prices crude oil natural gas partially offset effect lower production company’s average realization crude oil natural gas liquids 2005 4697 per barrel compared 3412 2004 2666 2003 average natural gas realization 743 per thousand cubic feet 2005 compared 551 501 2004 2003 respectively net oilequivalent production 2005 averaged 727000 barrels per day 11 percent 2004 22 percent 2003 decline 2004 2005 result effects hurricanes property sales normal field declines partially offset benefit fs7 management’s discussion analysis financial condition results operations five months production 2005 properties acquired unocal lower production 2003 2004 associated property sales effects storms normal field declines net liquids component oilequivalent production 2005 averaged 455000 barrels per day decline 10 percent 2004 19 percent 2003 absent effects unocal volumes 2005 property sales storms net liquids production 2005 declined 6 percent 11 percent 2004 2003 respectively net natural gas production averaged 16 billion cubic feet per day 2005 13 percent 27 percent 2004 2003 respectively excluding unocal volumes 2005 effects property sales shutin production related storms net natural gas production 2005 declined 10 percent 2004 20 percent 2003 refer “selected operating data” table page fs12 threeyear comparative production volumes united states special items recorded 2005 special items 2004 included gains 366 million property sales partially offset charges 55 million due adverse litigation matter net special charges 64 million 2003 composed charges 103 million asset impairments associated mainly writedown assets anticipation sale charges 38 million restructuring reorganization mainly employee severance costs gains 77 million property sales international upstream exploration production international upstream income 75 billion 2005 increased 17 billion 58 billion 2004 higher prices crude oil natural gas 2005 earnings former unocal operations increased earnings approximately 29 billion periods 80 percent benefit arose effect higher prices heritagechevron production partially offsetting benefits higher expenses periods heritagechevron operations certain incometax items including absence 200 million benefit 2004 relating changes income tax laws change years also reflected impact 851 million specialitem gains 2004 special items recorded 2005 foreign currency losses 2004 129 million gains 14 million recorded 2005 income 58 billion 2004 nearly 25 billion higher earnings recorded 2003 approximately 900 million increase difference effects period special items discussed foreign currency losses approximately 11 billion increase associated higher prices crude oil natural gas another 400 million resulted lower incometax expense periods including benefit 200 million 2004 result changes income tax laws partially offsetting effects higher transportation costs 2006 200 million balance change periods associated gain 2003 implementation new accounting standard refer note 24 beginning page fs59 discussion fas 143 “accounting asset retirement obligations” net oilequivalent production 18 million barrels per day 2005 including 143000 net barrels per day oil sands canada production operating service agreement venezuela increased 6 percent 2004 5 percent 2003 absent net effect increased volumes 2005 five months production former unocal operations effect property fs8 sales effect higher prices costrecovery variableroyalty provisions certain contracts oilequivalent production 2005 essentially 2004 2003 net liquids component oilequivalent production 14 million barrels per day 2005 unchanged 2004 2003 excluding effects unocal production property sales effect higher prices costrecovery variableroyalty volumes 2005 net liquids production essentially 2004 decreased 1 percent 2003 net natural gas production 26 billion cubic feet per day 2005 25 percent 26 percent 2004 2003 respectively excluding effect production unocal properties production increased 2 percent 3 percent 2004 2003 respectively refer “selected operating data” table page fs12 threeyear comparative international production volumes special items recorded 2005 specialitem gains 2004 included 585 million sale producing properties western canada 266 million sale nonstrategic assets including company’s operations democratic republic congo canadian naturalgas processing business 2003 net specialitem gains 98 million included benefits 150 million related income taxes property sales partially offset asset impairments charges employee termination costs us downstream refining marketing transportation us downstream earnings nearly 1 billion 2005 decreased 300 million 2004 500 million 2003 results 2003 included net specialitem charges discussed 123 million average refinedproduct margins 2005 higher 2004 margins 2004 significantly higher 2003 however effects increased downtime refineries facilities higher fuel costs dampened earnings 2005 portion downtime 2005 associated hurricanes gulf mexico result storms company’s refinery pascagoula mississippi shut month company’s marketing pipeline operations along gulf coast also disrupted extended period sales volumes refined products 2005 approximately 15 million barrels per day 2 percent lower 2004 branded gasoline sales volumes approximately 600000 barrels per day increased 4 percent 2004 period 2004 refinedproduct sales volumes increased 5 percent 2003 primarily due higher sales gasoline diesel fuel oil refer “selected operating data” table page fs12 threeyear comparative refinedproduct sales volumes united states 2003 net specialitem charges 123 million included 132 million environmental remediation 28 million employee severance costs associated global downstream restructuring reorganization charges partially offset net gains 37 million asset sales international downstream refining marketing transportation international downstream includes company’s consolidated refining marketing businesses nonus shipping operations nonus supply trading activities equity earnings affiliates primarily asiapacific region income nearly 18 billion 2005 decreased 10 percent 2 billion 2004 11 billion 2003 decrease 2004 period due mainly lower sales volumes higher costs fuel transportation expenses associated explosion fire 40 percentowned nonoperated terminal united kingdom tax adjustments various countries items offset improvement average refinedproduct fs9 management’s discussion analysis financial condition results operations margins periods 13 billion increase income 2003 2004 reflected significantly higher average refinedproduct margins company’s operating areas higher earnings international shipping operations earnings 2003 also included specialitem charges discussed foreign currency losses totaled 300 million total international refined products sales volumes 23 million barrels per day 2005 4 percent lower 2004 sales decline primarily result lower gasoline trading activity lower fueloil sales refined product sales volume 24 million barrels per day 2004 4 percent higher 23 million 2003 refer “selected operating data” table page fs12 threeyear comparative refinedproduct sales volumes international areas specialitem charges 189 million 2003 included writedown batangas refinery philippines advance conversion product terminal facility employee severance costs associated global downstream restructuring reorganization recognition impairment certain assets anticipation sale company’s share losses asset sale asset impairment equity affiliate chemicals segment includes company’s oronite subsidiary company’s 50 percent share equity investment chevron phillips chemical company llc cpchem 2005 results company’s oronite subsidiary due significantly higher costs feedstocks adverse effects shutdown operations us gulf coast due hurricanes earnings 2005 cpchem higher 2004 improved margins commodity chemicals results businesses 2005 dampened effects us hurricanes significantly lower earnings 2003 reflected weak demand commodity chemicals industry oversupply conditions period consists company’s interest dynegy mining operations coal minerals power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 689 million 2005 increased significantly 20 million 2004 approximately 400 million change related larger benefits 2004 fs10 corporatelevel tax adjustments higher charges 2005 associated environmental remediation properties sold idled ongoing unocal corporatelevel activities interest expense also higher 2005 due increase interest rates debt assumed unocal acquisition improvement 2003 2004 primarily associated company’s investment dynegy including gains redemption certain dynegy securities higher interest income lower interest expense favorable corporatelevel tax adjustments net specialitem gains 2003 included dynegyrelated net benefit 325 million composed gain 365 million exchange company’s investment dynegy securities partially offset 40 million charge chevron’s share asset impairment dynegy specialitem charges asset writedowns 84 million primarily chevron’s gasification business employee severance costs 16 million consolidated statement income comparative amounts certain income statement categories shown amounts associated special items comparative periods also indicated assist explanation periodtoperiod changes besides information section separately disclosed face consolidated statement income gain exchange dynegy securities cumulative effect changes accounting principles matters discussed elsewhere management’s discussion analysis note 27 consolidated financial statements page fs62 refer results operations section beginning page fs7 additional information relating specialitem gains charges sales operating revenues 2005 increased 2004 2003 due primarily higher prices crude oil natural gas refined products worldwide amount 2005 also included revenues five months former unocal operations improved results tengizchevroil hamaca venezuela accounted nearly threefourths increased income equity affiliates 2005 profits 2005 also increased company’s cpchem dynegy affiliates improvement 2004 2003 result higher earnings company’s downstream affiliates asiapacific area tengizchevroil cpchem dynegy caspian pipeline consortium refer note 13 beginning page fs44 discussion chevron’s investment affiliated companies income 2005 included specialitem gains losses however net specialitem gains relating upstream property sales nearly 13 billion 2004 200 million 2003 increase 2003 2005 otherwise partly due higher interest income period 400 million 2005 200 million 2004 120 million 2003 higher average interest rates balances cash marketable securities foreign currency losses 60 million 2005 2004 200 million 2003 crude oil product purchases 2005 increased approximately 35 percent 2004 due mainly higher prices crude oil natural gas refined products well inclusion 2005 unocalrelated amounts five months crude oil product purchase costs increased 32 percent 2004 prior year result higher prices increased purchased volumes crude oil products operating selling general administrative expenses 2005 increased 18 percent year earlier higher amounts 2005 included formerunocal expenses five months heritagechevron operations higher costs labor transportation uninsured costs associated storms gulf mexico asset writeoffs repair maintenance services fuel costs plant operations number corporate items individually significant total expenses increased 2003 2004 due mainly costs chartering crude oil tankers transportation expenses exploration expenses 2005 increased mainly due inclusion unocal amounts five months 2004 amounts higher 2003 international operations primarily seismic costs expenses associated evaluating feasibility different project alternatives fs11 management’s discussion analysis financial condition results operations depreciation depletion amortization expenses 2005 increased mainly result five months depreciation depletion expense former unocal assets higher depreciation rates certain heritagechevron crude oil natural gas producing fields worldwide 2003 2004 expenses change materially consideration effects specialitem charges asset impairments 2003 interest debt expense 2005 increased mainly due inclusion debt assumed unocal acquisition higher average interest rates commercial paper borrowings decline 2003 2004 reflected lower average debt balances taxes income 2005 increased result higher international taxes assessed product values higher duty rates areas company’s european downstream operations higher us federal excise taxes jet fuel resulting change tax law became effective 2005 increase 2004 2003 primarily reflected weakening us dollar foreign currencydenominated duties company’s european downstream operations effective income tax rates 44 percent 2005 37 percent 2004 43 percent 2003 excluding effect net special items rates higher 2005 compared prior year due absence benefits 2004 changes income tax laws certain international operations increase earnings countries higher tax rates compared effective tax rate 2003 effective tax rate 2004 benefited changes income tax laws certain international operations change mix international upstream earnings occurring countries different tax rates favorable corporate consolidated tax effects refer also discussion income taxes note 16 consolidated financial statements beginning page fs47 selected operating data12 fs12 information related investment dynegy inc yearend 2005 chevron owned approximate 24 percent equity interest common stock dynegy provider electricity markets customers throughout united states company also held investment dynegy preferred stock investment dynegy common stock december 31 2005 carrying value company’s investment dynegy common stock approximately 300 million amount 200 million company’s proportionate interest dynegy’s underlying net assets difference primarily result writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors associated decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly appropriate recognize portion difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock end 2005 approximately 470 million investments dynegy preferred stock end 2005 company held 400 million face value dynegy series c convertible preferred stock stated maturity 2033 stock accounted fair value estimated 360 million yearend 2005 temporary changes estimated fair value preferred stock reported “other comprehensive income” however future period decline fair value deemed temporary charge income period would recorded dividends received preferred stock recorded income period received liquidity capital resources cash equivalents marketable securities total balances 111 billion 107 billion december 31 2005 2004 respectively cash provided operating activities 2005 201 billion compared 147 billion 2004 123 billion 2003 2005 increase cash provided operating activities mainly reflected higher earnings upstream segment including earnings former unocal operations cash provided operating activities net contributions employee pension plans 10 billion 16 billion 14 billion 2005 2004 2003 respectively cash provided investing activities included proceeds asset sales 27 billion 2005 37 billion 2004 11 billion 2003 cash provided operating activities asset sales 2005 sufficient fund company’s 87 billion capital exploratory program pay 38 billion dividends stockholders repay approximately 970 million longterm debt repurchase 3 billion common stock partial consideration acquisition unocal august 2005 also included 75 billion cash unocal balances cash equivalents marketable securities acquisition date totaled 16 billion dividends company paid dividends approximately 38 billion 2005 32 billion 2004 3 billion 2003 april 2005 company increased quarterly common stock dividend 125 percent 45 cents per share debt capital lease minority interest obligations total debt capital lease balances 129 billion december 31 2005 113 billion yearend 2004 2005 yearend balance included approximately 22 billion debt capital lease obligations assumed acquisition unocal company also minority interest obligations 200 million 172 million december 31 2004 company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 56 billion december 31 2005 unchanged december 31 2004 amounts 49 billion 47 billion reclassified longterm end period respectively yearend 2005 settlement obligations expected require use working capital 2006 company intent ability evidenced committed credit facilities refinance longterm basis company’s practice continually refinance commercial paper maintaining levels believes appropriate economic yearend 2005 company 49 billion committed credit facilities various major banks permitted refinancing shortterm obligations longterm basis facilities support commercial paper borrowings also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management fs13 management’s discussion analysis financial condition results operations believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2005 addition company three existing effective “shelf” registration statements file securities exchange commission together would permit additional registered debt offerings aggregate 38 billion debt securities following acquisition unocal company withdrew unocal’s “shelf” registration statements october 2005 company fully redeemed unocal subsidiary pure resources’ 7125 percent senior notes due 2011 395 million company’s 150 million texaco brasil zero coupon notes paid maturity november 2005 december 2005 company exercised parcall redemption 200 million texaco capital inc 57 percent notes due 2008 february 2006 company retired union oil bonds maturity approximately 185 million texaco capital llc wholly owned finance subsidiary issued deferred preferred shares series c series c december 1995 february 2005 company redeemed series c shares paid accumulated dividends approximately 140 million january 2005 company contributed 98 million employee stock ownership plan esop permit esop make 144 million debt service payment included principal payment 113 million second quarter 2004 chevron entered 1 billion interest rate fixedtofloating swap transactions company receives fixed interest rate pays floating rate based notional principal amounts terms swap agreements 250 million 750 million terminate september 2007 february 2008 respectively net cash settlement based difference fixedrate floating rate interest amounts chevron’s senior debt rated aa standard poor’s corporation aa2 moody’s investors service company’s senior debt texaco capital inc rated aa3 union oil company california bonds rated a1 moody’s companies wholly owned subsidiaries chevron company’s us commercial paper rated a1 standard poor’s p1 moody’s company’s canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions reductions debt balances december 31 2005 dependent upon many factors including management’s continuous assessment debt appropriate component company’s overall capital structure company believes substantial borrowing capacity meet unanticipated cash requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals company believes flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program connection 5 billion stock repurchase program initiated april 2004 company acquired 921 million common shares 5 billion november 2005 498 million common shares repurchased program total cost 29 billion december 2005 company authorized acquisition additional 5 billion common shares time prevailing prices permitted securities laws legal requirements subject market conditions factors program period three years may discontinued time program company acquired approximately 17 million shares open market 100 million december 2005 purchases midfebruary 2006 increased total shares acquired 83 million cost 481 million capital exploratory expenditures excluding 173 billion acquisition unocal corporation total reported expenditures 2005 111 billion including 17 billion company’s share affiliates’ expenditures require cash outlays company 2004 capital exploratory expenditures fs14 2003 expenditures 83 billion 74 billion respectively including company’s share affiliates’ expenditures 16 billion 11 billion corresponding periods 111 billion expenditures 2005 threefourths 84 billion related upstream activities approximately percentage also expended upstream operations 2004 2003 international upstream accounted 70 percent worldwide upstream investment years reflecting company’s continuing focus opportunities available outside united states 2006 company estimates capital exploratory expenditures 33 percent higher 148 billion including spending affiliates threefourths 113 billion exploration production activities 8 billion amount outside united states spending primarily targeted exploratory prospects deepwater gulf mexico western africa major development projects angola nigeria kazakhstan deepwater gulf mexico included upstream expenditures 1 billion develop company’s international natural gas resource base worldwide downstream spending 2006 estimated 28 billion 19 billion refining marketing 900 million supply transportation projects including pipelines support expanded upstream production approximately twothirds total projected spending outside united states investments chemicals businesses 2006 budgeted 250 million estimates energy technology information technology facilities real estate activities powerrelated businesses total approximately 460 million pension obligations 2005 company’s pension plan contributions totaled approximately 1 billion including nearly 200 million unocal plans approximately 800 million total contributed us plans 2006 company estimates contributions 500 million actual amounts dependent upon planinvestment results changes pension obligations regulatory environments economic factors additional funding may required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs22 financial ratios financial ratios current ratio current assets divided current liabilities current ratio periods adversely affected fact chevron’s inventories valued lifo basis yearend 2005 book value inventory lower replacement costs based average acquisition costs year approximately 48 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs company’s interest coverage ratio essentially unchanged 2004 2005 interest coverage ratio higher 2004 compared 2003 primarily due higher beforetax income lower average debt balances debt ratio total debt percentage total debt plus equity although total debt higher end 2005 year earlier debt ratio declined result higher stockholders’ equity balances retained earnings capital stock issued connection unocal acquisition decline debt ratio 2003 2004 primarily due lower debt levels higher retained earnings fs15 management’s discussion analysis financial condition results operations guarantees offbalancesheet arrangements contractual obligations contingencies direct indirect guarantees amounts exclude indemnifications contingencies associated sale company’s interest equilon motiva 2002 discussed “indemnifications” section page fs16 fs17 december 31 2005 company subsidiaries provided guarantees either directly indirectly 985 million guarantees notes contractual obligations affiliated companies 294 million third parties described major category material amounts carried liabilities company’s obligations guarantees 985 million guarantees provided affiliates 806 million relate borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction period capital projects included amounts unocalrelated guarantees 230 million associated construction completion guarantee debt financing unocal’s equity interest bakutbilisiceyhan btc crude oil pipeline project approximately 95 percent amounts guaranteed expire 2006 2010 remaining guarantees expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees remaining balance 179 million represents obligations connection pricing powerpurchase agreements certain company’s cogeneration affiliates terms guarantees company may required make payments certain conditions affiliates perform agreements recourse provisions third parties assets held collateral pricing guarantees 294 million provided third parties including guarantees approximately 150 million related construction loans host governments company’s international upstream operations remaining guarantees 144 million provided principally con ditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities 85 percent total amounts guaranteed expire 2010 remainder expiring 2010 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 85 million guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets december 31 2005 chevron also outstanding guarantees 190 million equilon debt leases following february 2002 disposition interest equilon company received indemnification shell oil company shell claims arising guarantees company recorded liability guarantees approximately 50 percent amounts guaranteed expire within 2006 2010 period guarantees remaining amounts expiring 2019 indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments indemnities cover certain contingent liabilities company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2005 company paid approximately 38 million indemnities company expects receive additional requests indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods texaco’s ownership interests joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon indemnities must asserted early february 2007 later february 2009 claims relating motiva must asserted later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers fs16 others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets unocal’s 76 products company business existed prior sale 1997 terms indemnities maximum limit amount potential future payments company however purchaser shares certain costs indemnity aggregate cap 200 million claims relating indemnities must asserted april 2022 end 2005 approximately 113 million applied cap includes payments made either unocal chevron totaling 80 million securitization company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2005 approximately 12 billion representing 7 percent chevron’s total current accounts receivable balance securitized chevron’s total estimated financial exposure securitizations december 31 2005 approximately 60 million arrangements effect accelerating chevron’s collection securitized amounts event spes experiencing major defaults collection receivables chevron believes would loss exposure connected thirdparty investments securitizations longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate supplier’s financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2006 22 billion 2007 19 billion 2008 18 billion 2009 18 billion 2010 05 billion 2011 38 billion total payments agreements approximately 21 billion 2005 16 billion 2004 14 billion 2003 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2006 13 billion 2007 13 billion 2008 13 billion 2009 13 billion 2005 terms agreement entered 2004 company exercised option acquire additional regasification capacity sabine pass liquefied natural gas terminal payments 25 billion 20year period expected commence 2009 minority interests company commitments approximately 200 million related minority interests subsidiary companies following table summarizes company’s significant contractual obligations contractual obligations 49 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20072009 period includes guarantees 247 lesop leveraged employee stock ownership plan debt 14 due 2006 233 due 2006 financial derivative instruments commodity derivative instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids refinery feedstock company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids chevron also uses derivative commodity instruments trading purposes results activity material company’s financial position net income cash flows 2005 company’s positions monitored managed daily basis internal risk control group ensure compliance company’s risk management policy approved audit committee company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures options swap contracts traded new york mercantile exchange international petroleum exchange addition crude oil natural gas refined product swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally market quotes independent thirdparty quotes hypothetical 10 percent increase price natural gas crude oil would increase fair value natural gas purchase derivative contracts approximately 33 million reduce fair value crude oil sale fs17 management’s discussion analysis financial condition results operations derivative contracts 11 million hypothetical decrease prices commodities would result opposite effects fair values contracts hypothetical effect contracts estimated calculating cash value contracts difference hypothetical contract delivery prices multiplied contract amounts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect hypothetical 10 percent increase value us dollar yearend 2005 would reduction fair value foreign exchange contracts approximately 70 million effect would opposite hypothetical 10 percent decrease yearend value us dollar interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2005 weighted average maturity “receive fixed” interest rate swaps approximately 2 years “receive floating” swaps outstanding year end hypothetical increase 10 basis points fixed interest rates would reduce fair value “receive fixed” swaps approximately 3 million financial derivative instruments discussed material change market risk 2005 2004 hypothetical variances used section selected illustrative purposes represent company’s estimation market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2005 annual report form 10k transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements place company’s refining affiliate thailand refer page fs17 discussion management believes foregoing agreements others negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party 70 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater resolution actions may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period company use mtbe manufacture gasoline united states environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas whether operating closed divested following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws included additions 2005 liabilities assumed connection acquisition unocal liabilities relate primarily sites divested closed unocal prior acquisition chevron includ fs18 ing limited former refineries transportation distribution facilities service stations former crude oil natural gas fields mining operations well active mining operations liability additions 2005 heritagechevron related primarily refinedproduct marketing sites various operating closed divested facilities united states company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2005 recorded liability material company’s financial position results operations liquidity december 31 2005 chevron involved remediation activities 221 sites identified potentially responsible party otherwise us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2005 139 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remaining yearend 2005 environmental reserves balance 1330 million 855 million related approximately 2250 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 475 million associated various sites international downstream 101 million upstream 257 million chemicals 50 million 67 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil andor groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although amount future costs may material company’s results operations period recognized company expect costs material adverse effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies effective january 1 2003 company implemented financial accounting standards board statement 143 “accounting asset retirement obligations” fas 143 fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability reasonably estimated liability balance 43 billion asset retirement obligations yearend 2005 related primarily upstream coal properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 24 beginning page fs59 related fas 143 company’s adoption 2005 fin 47 fasb interpretation 47 “accounting conditional asset retirement obligations interpretation fasb statement 143” fin 47 discussion “environmental matters” page fs21 income taxes company calculates income tax expense liabilities quarterly liabilities generally finalized individual taxing authorities several years end annual period income taxes calculated us federal income tax liabilities settled 1996 chevron corporation formerly chevrontexaco corporation 1997 chevron global energy inc formerly caltex corporation unocal corporation unocal texaco inc texaco company’s california franchise tax liabilities settled 1991 chevron 1998 unocal 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise fs19 management’s discussion analysis financial condition results operations taxes years examination subject future examination global operations chevron affiliates conduct business activities approximately 180 countries areas company affiliates significant operations ownership interests include united states canada australia united kingdom norway denmark france netherlands partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad south africa democratic republic congo indonesia bangladesh philippines myanmar singapore china thailand vietnam cambodia azerbaijan kazakhstan venezuela argentina brazil colombia trinidad tobago south korea company’s caspian pipeline consortium cpc affiliate operates russia kazakhstan company’s tengizchevroil affiliate operates kazakhstan affiliate company participates development bakutbilisiceyhan btc pipeline azerbaijan georgia turkey also affiliate company interest chadcameroon pipeline company’s petrolera ameriven affiliate operates hamaca project venezuela company’s chevron phillips chemical company llc cpchem affiliate manufactures markets wide range petrochemicals worldwide basis manufacturing facilities united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken host governments increase public ownership company’s partially wholly owned businesses assets impose additional taxes royalties company’s operations certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest acts violence strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries refer page fs6 discussion company’s transition agreement petróleos de venezuela sa pdvsa venezuelan stateowned petroleum company convert contracts boscan ll652 operating service agreements empresa mixta suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions company decides continue development costs wells expensed december 31 2005 company approximately 11 billion suspended exploratory wells included properties plant equipment increase 400 million 2004 increase less 600 million 2003 increase 2005 300 million yearend suspended well balance formerunocal operations yearend 2005 balance primarily reflects drilling activities united states nigeria indonesia future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 11 billion suspended wells yearend 2005 uncertain pending future activities including normal project evaluation additional drilling refer note 20 beginning page fs49 additional discussion suspended wells equity redetermination crude oil natural gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevron currently estimates maximum possible net beforetax liability approximately 200 million time possible maximum net amount could owed chevron estimated 50 million timing settlement exact amount within range estimates uncertain accounting buysell contracts first quarter 2005 securities exchange commission sec issued comment letters chevron companies oil gas industry requesting disclosure information related accounting buysell contracts buysell contract company agrees buy specific quantity quality commodity delivered specific location simultaneously agreeing sell specified quantity quality commodity different location counterparty physical delivery occurs side transaction risk reward ownership evidenced title transfer assumption environmental risk transportation scheduling credit risk nonperfor fs20 mance counterparty parties settle side buysell separate invoicing company routinely enters buysell contracts primarily united states downstream business associated crude oil refined products crude oil contracts used facilitate company’s crude oil marketing activity includes purchase sale crude oil production fulfillment company’s supply arrangements physical delivery location crude oil specifications purchase crude oil supply company’s refining system refined products buysell arrangements used help fulfill company’s supply agreements customer locations specifications company historically accounted buysell transactions consolidated statement income monetary transaction purchases reported “purchased crude oil products” sales reported “sales operating revenues” sec raised issue whether accounting buysell contracts shown net income statement accounted provisions accounting principles board apb opinion 29 “accounting nonmonetary transactions” apb 29 company understands others oil gas industry may report buysell transactions net basis income statement rather gross emerging issues task force eitf fasb deliberated topic issue 0413 “accounting purchases sales inventory counterparty” eitf 0413 september 2005 meeting eitf reached consensus two legally separate exchange transactions counterparty including buysell transactions combined considered single arrangement purposes applying apb 29 transactions entered “in contemplation” one another eitf 0413 ratified fasb september 2005 effective new arrangements modifications renewals existing arrangements entered beginning april 1 2006 effective date company’s adoption standard upon adoption company report net effect buysell transactions consolidated statement income “purchased crude oil products” instead reporting revenues associated arrangements “sales operating revenues” costs “purchased crude oil products” issue deliberation eitf sec staff directed chevron companies disclose face income statement amounts associated buysell contracts discuss footnote financial statements basis underlying accounting amounts buysell contracts shown company’s consolidated statement income “sales operating revenues” three years ending december 31 2005 23822 18650 14246 respectively revenue amounts associated buysell contracts represented 12 percent total “sales operating revenues” 2005 2004 2003 nearly revenue amounts period associated buysell contracts pertain company’s downstream segment costs associated buysell revenue amounts included “purchased crude oil products” consolidated statement income period contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant may take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2005 approximately 13 billion consolidated companies included expenditures 341 million environmental capital expenditures 979 million costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites includes 14 million 66 million respectively unocal activities last five months 2005 2006 total worldwide environmental capital expenditures estimated 11 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred fs21 management’s discussion analysis financial condition results operations future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation oil gas reserves sec rules require ”geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” beginning page fs70 changes estimates three years ending december 31 2005 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs78 estimates provedreserve values three years ending december 31 2003 2005 based yearend prices time note 1 consolidated financial statements beginning page fs34 includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment property plant equipment investments affiliates” page fs23 includes reference conditions downward revisions proved reserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs34 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement employee benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb expense discount rate applied benefit obligations assumed health care costtrend rates used calculation benefit obligations note 21 beginning page fs50 includes information three years ending december 31 2005 components pension opeb expense underlying assumptions well funded status company’s pension plans end 2005 2004 estimate longterm rate return pension assets company employs rigorous process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan asset liability studies determination company’s estimates longterm rates return consistent fs22 studies expected longterm rate return united states pension plan assets account 72 percent company’s pension plan assets remained 78 percent since 2002 yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets measurement date used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2005 company selected 55 percent discount rate based moody’s aa corporate bond index cash flow analysis using citigroup pension discount curve major us pension postretirement benefit plans discount rates end 2004 2003 58 percent 6 percent respectively increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2005 approximately 600 million indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan accounted 53 percent companywide pension obligation would reduced total pension plan expense 2005 approximately 50 million 1 percent increase discount rate plan would reduced total benefit plan expense 2005 approximately 130 million actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2005 company’s pension plan contributions approximately 1 billion nearly 800 million us plans 2006 company expects contributions approximately 500 million actual contribution amounts dependent upon planinvestment results changes pension obligations regulatory environments economic factors additional funding may required investment returns insufficient offset increases plan obligations pension expense recorded consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments depending upon funding status different plans either longterm prepaid asset longterm liability recorded unfunded accumulated benefit obligation excess recorded liabilities recorded “other comprehensive income” see note 21 consolidated financial statements beginning page fs50 pensionrelated balance sheet effects end 2005 2004 company’s opeb plans expense 2005 200 million also recorded “operating expenses” “selling general administrative expenses” business segments effective january 1 2005 company amended main us postretirement medical plan limit future increases company contribution current retirees increase company contribution capped 4 percent year future retirees 4 percent cap effective retirement active employees retirees age 65 whose claims experiences combined rating purposes assumed health care cost trend rates start 10 percent 2006 gradually drop 5 percent 2011 beyond indication discount rate sensitivity determination opeb expense 2005 1 percent increase discount rate company’s primary us opeb plan accounted 80 percent companywide opeb obligation would decreased opeb expense approximately 20 million impairment property plant equipment investments affiliates company assesses property plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supply demand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions amount income statement classification major impairments ppe three years ending december 31 2005 included commentary business segments elsewhere discussion estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees fs23 management’s discussion analysis financial condition results operations reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets asset held sale estimated proceeds less costs sell less associated carrying values business combinations purchaseprice allocation accounting business combinations requires allocation company’s purchase price various assets liabilities acquired business respective fair values company uses available information make fair value determinations major acquisitions may hire independent appraisal firm assist making fairvalue estimates instances assumptions respect timing amount future revenues expenses associated asset might used determining fair value actual timing amount net cash flows revenues expenses related asset time may differ materially initial estimates timing delayed significantly net cash flows decline significantly asset could become impaired goodwill acquired part business combination goodwill subject amortization required financial accounting standards board fasb statement 142 “goodwill intangible assets” company test goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount goodwill arising unocal acquisition described detail note 2 beginning page fs36 contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income refer business segment discussions elsewhere discussion effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2005 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss fs24 new accounting standards fasb statement 151 “inventory costs amendment arb 43 chapter 4 fas 151 november 2004 fasb issued fas 151 became effective company january 1 2006 standard amends guidance accounting research bulletin arb 43 chapter 4 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs spoilage addition standard requires allocation fixed production overheads costs conversion based normal capacity production facilities adoption standard impact company’s results operations financial position liquidity eitf issue 046 “accounting stripping costs incurred production mining industry” issue 046 march 2005 fasb ratified earlier eitf consensus issue 046 effective company january 1 2006 stripping costs removing overburden waste materials access mineral deposits consensus calls stripping costs incurred mine goes production treated variable production costs considered component mineral inventory cost subject arb 43 “restatement revision accounting research bulletins” adoption accounting coal oil sands mining operations significant effect company’s results operations financial position liquidity fs25 company’s common stock listed new york stock exchange trading symbol cvx pacific exchange february 23 2006 stockholders record numbered approximately 230000 restrictions company’s ability pay dividends fs26 stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2005 company management’s assessment effectiveness internal control financial reporting december 31 2005 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein david j o’reilly david j o’reilly chairman board chief executive officer february 27 2006 stephen j crowe stephen j crowe vice president chief financial officer mark humphrey mark humphrey vice president comptroller fs27 stockholders board directors chevron corporation completed integrated audits chevron corporation’s 2005 2004 consolidated financial statements internal control financial reporting december 31 2005 audit 2003 consolidated financial statements accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 annual report form 10k present fairly material respects financial position chevron corporation subsidiaries december 31 2005 2004 results operations cash flows three years period ended december 31 2005 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 24 beginning page fs59 consolidated financial statements company changed method accounting asset retirement obligations january 1 2003 internal control financial reporting also opinion management’s assessment included accompanying management’s report internal control financial reporting company maintained effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2005 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate pricewaterhousecoopers llp san francisco california february 27 2006 fs28 1 includes consumer excise taxes 8719 7968 7095 2 includes amounts revenues buysell contracts associated costs “purchased crude oil products” see note 15 page fs46 23822 18650 14246 3 periods reflect twoforone stock split effected 100 percent stock dividend september 2004 see accompanying notes consolidated financial statements fs29 see accompanying notes consolidated financial statements fs30 see accompanying notes consolidated financial statements fs31 see accompanying notes consolidated financial statements fs32 2003 restated reflect twoforone stock split effected 100 percent stock dividend september 2004 includes unocal balances december 31 2005 see accompanying notes consolidated financial statements fs33 note 1 summary significant accounting policies general chevron manages investments provides administrative financial management support us foreign subsidiaries affiliates engage fully integrated petroleum chemicals operations addition chevron holds investments businesses involving power generation geothermal production mining coal minerals collectively companies conduct business activities approximately 180 countries exploration production upstream operations consist exploring developing producing crude oil natural gas also marketing natural gas refining marketing transportation downstream operations relate refining crude oil finished petroleum products marketing crude oil natural gas many products derived petroleum transporting crude oil natural gas petroleum products pipeline marine vessel motor equipment rail car chemical operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lubricant oil additives company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percent owned variable interest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income deferred income taxes provided gains losses investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value subsequent recoveries carrying value investments reported “other comprehensive income” differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference company’s share affiliate’s reported earnings adjusted quarterly appropriate reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity commodity derivative instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” markedtomarket fs34 unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 20 beginning page fs49 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession field basis appropriate refining marketing transportation chemical areas impairment reviews generally done basis refinery plant marketing area marketing assets country impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value effective january 1 2003 company implemented financial accounting standards board statement 143 “accounting asset retirement obligations fas 143” fair value liability asset retirement obligation recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 24 beginning page fs59 relating asset retirement obligations includes additional information company’s adoption fas 143 depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses coal assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill acquired business combination subject amortization required financial accounting standards board fasb statement 142 “goodwill intangible assets” company test goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount goodwill arising unocal acquisition described detail note 2 beginning page fs36 environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized fs35 notes consolidated financial statements millions dollars except pershare amounts liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas coal producing properties liability asset retirement obligation made following fas 143 refer note 24 beginning page fs59 discussion fas 143 federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized basis company’s net working interest entitlement method refer note 15 beginning page fs46 discussion accounting buysell arrangements stock options sharebased compensation effective july 1 2005 company adopted provisions financial accounting standards board fasb statement 123r “sharebased payment” fas 123r sharebased compensation plans company previously accounted plans recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” apb 25 related interpretations disclosure requirements established fas 123 “accounting stockbased compensation” refer note 22 beginning page fs54 description company’s sharebased compensation plans information related awards granted plans additional information company’s adoption fas 123r following table illustrates effect net income earnings per share company applied fairvalue recognition provisions fas 123 stock options stock appreciation rights performance units restricted stock units periods prior adoption fas 123r actual effect net income earnings per share periods adoption fas 123r periods prior 2005 conformed 2005 presentation fair value determined using blackscholes optionpricing model pershare amounts periods refl ect twoforone stock split effected 100 percent stock dividend september 2004 amounts 2003 include benefit 008 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly company’s retained earnings included net income period note 2 acquisition unocal corporation august 10 2005 company acquired unocal corporation unocal independent oil gas exploration production company unocal’s principal upstream operations north america asia including caspian region also located asia unocal’s geothermal energy electrical power businesses activities include ownership interests proprietary common carrier pipelines natural gas storage facilities mining operations aggregate purchase price unocal approximately 17300 included approximately 7500 cash 169 million shares chevron common stock valued 9600 200 stock options approximately 5 million shares mergerrelated fees value common shares based average market price 5day period beginning two days terms acquisition finalized announced july 19 2005 issued shares represented approximately 75 percent number shares outstanding immediately august 10 close value stock options acquisition date determined using blackscholes optionpricing model thirdparty appraisal firm engaged assist company process determining fair values fs36 unocal’s tangible intangible assets initial fairvalue estimates made third quarter 2005 adjustments initial estimates made fourth quarter company expects valuation process finalized first half 2006 completed associated deferred tax liabilities also adjusted significant intangible assets goodwill included preliminary allocation purchase price table inprocess research development assets acquired acquisition accounted rules financial accounting standards board fasb statement 141 “business combinations” following table summarizes preliminary allocation purchase price unocal’s assets liabilities 4700 goodwill assigned upstream segment none goodwill deductible tax purposes goodwill represents benefits acquisition additional fair values net assets acquired primary reasons acquisition principal factors contributed unocal purchase price resulted recognition goodwill follows • “going concern” element unocal businesses presents opportunity earn higher rate return assembled collection net assets would expected assets acquired separately benefits include upstream growth opportunities asiapacific gulf mexico caspian regions areas contain operations complementary chevron’s acquisition consistent chevron’s longterm strategies grow profitability core upstream areas build new legacy positions commercialize company’s large undeveloped natural gas resource base • cost savings obtained capture operational synergies opportunities cost savings include elimination duplicate facilities services highgrading investment opportunities combined portfolio sharing best practices two companies goodwill recorded acquisition subject amortization tested periodically impairment required fasb statement 142 “goodwill intangible assets” following unaudited pro forma summary presents results operations acquisition unocal occurred beginning period pro forma summary uses estimates assumptions based information available time management believes estimates assumptions reasonable however actual results may differ significantly pro forma financial information pro forma information reflect synergistic savings might achieved combining operations intended reflect actual results would occurred companies actually combined periods presented note 3 information relating consolidated statement cash flows 2005 “net increase operating working capital” included reduction 20 excess income tax benefits associated stock options exercised since july 1 2005 accordance cashflows classifi cation requirements fs37 notes consolidated financial statements millions dollars except pershare amounts note 3 information relating consolidated statement cash flows continued fas 123r “sharebased payment” amount offset equal amount “net purchases treasury shares” refer note 22 beginning page fs54 additional information related company’s adoption fas 123r “net purchases sales treasury shares” 2005 2004 included purchases 3029 2122 respectively related company’s common stock repurchase programs sharebased compensation plans partially offset issuance shares exercise stock options 2003 “net cash provided operating activities” included 890 “decrease deferred charges” decrease amount “other” related balance sheet netting certain pensionrelated asset liability accounts accordance requirements financial accounting standards board fasb statement 87 “employers’ accounting pensions” “cash portion unocal acquisition net unocal cash received” represents purchase price net 1600 cash received aggregate purchase price unocal 17300 refer note 2 starting page fs36 additional discussion unocal acquisition major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented management’s discussion analysis beginning page fs13 presented following table net noncash additions 435 2005 212 2004 1183 2003 includes deferred payment 210 related 1993 acquisition company’s interest tengizchevroil joint venture note 4 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum natural gas liquids excluding regulated pipeline operations chevron cusa also holds chevron’s investments chevron phillips chemical company llc cpchem joint venture dynegy inc dynegy accounted using equity method 2003 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa chevron companies merged cusa summarized financial information cusa consolidated subsidiaries presented following table gives retroactive effect reorganizations periods presented companies always combined reorganizations occurred january 1 2003 however financial information included table may reflect financial position operating results future historical results periods presented reorganizations actually occurred january 1 2003 net income includes charge 323 cumulative effect changes accounting principles note 5 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented following table fs38 note 5 summarized financial data chevron transport corporation ltd continued restrictions ctc’s ability pay dividends make loans advances december 31 2005 note 6 stockholders’ equity retained earnings december 31 2005 2004 included approximately 5000 3950 respectively company’s share undistributed earnings equity affiliates december 31 2005 142 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron corporation longterm incentive plan ltip amended restated approved stockholders 2004 addition approximately 561 thousand shares remain available issuance 800 thousand shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan nonemployee directors’ plan approved stockholders 2003 refer note 26 page fs62 discussion company’s common stock split 2004 note 7 financial derivative instruments commodity derivative instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale crude oil feedstock purchases company refineries crude oil refined products inventories fixedprice contracts sell natural gas natural gas liquids company also uses derivative commodity instruments limited trading purposes company uses international swaps dealers association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net markedtomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” activities reported “operating activities” consolidated statement cash flows interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income fair values interest rate swaps reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported directly income part “interest debt expense” activities reported “operating activities” consolidated statement cash flows fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend fs39 notes consolidated financial statements millions dollars except pershare amounts note 7 financial derivative instruments continued longterm debt 7424 5815 estimated fair values 7945 6444 december 31 2005 2004 respectively interest rate swaps notional principal amounts 1400 1665 estimated fair values 10 36 december 31 2005 2004 respectively company holds cash equivalents us dollar marketable securities domestic offshore portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 8995 8789 december 31 2005 2004 respectively balances 7894 7338 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately 2 years financial derivative instruments discussed material change market risk presented 2004 concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers investment dynegy preferred stock december 31 2005 company held investment 400 face value dynegy series c convertible preferred stock stated maturity date 2033 stock recorded fair value estimated 360 end 2005 temporary changes estimated fair value preferred stock reported “other comprehensive income” however future decline fair value deemed temporary charge income period would recorded dividends payable preferred stock recognized income period note 8 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates purpose investments grouped follows upstream exploration production downstream refining marketing transportation chemicals first three groupings represent company’s “reportable segments” “operating segments” defined fas 131 “disclosures segments enterprise related information” segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined fas 131 codm company’s executive committee senior officers includes chief executive officer turn reports board directors chevron corporation operating segments represent components company described fas 131 terms engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assess performance c discrete financial information available segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members executive committee also individual management responsibilities participate committees purposes acting codm “all other” activities include company’s interest dynegy mining operations coal minerals power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level fs40 note 8 operating segments geographic data continued “all other” aftertax segment income loss continuing operations presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2005 2004 follow assets consist primarily worldwide cash equivalents marketable securities real estate information systems company’s investment dynegy mining operations coal minerals power generation businesses technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2005 2004 2003 presented following table products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products revenues chemicals segment derived primarily manufacture sale additives lubricants fuel “all other” activities include revenues mining operations coal minerals power generation businesses insurance operations real estate activities technology companies united states country chevron recorded significant revenues united kingdom revenues 15296 13985 12121 2005 2004 2003 respectively fs41 notes consolidated financial statements millions dollars except pershare amounts note 8 operating segments geographic data continued includes buysell contracts 23822 2005 18650 2004 14246 2003 substantially amounts period relates downstream segment refer note 15 beginning page fs46 discussion company’s accounting buysell contracts segment income taxes segment income tax expenses years 2005 2004 2003 follows see note 24 beginning page fs59 information concerning cumulative effect changes accounting principles due adoption fas 143 “accounting asset retirement obligations” income tax expense 100 50 related discontinued operations 2004 2003 respectively included segment information additional information segmentation major equity affiliates contained note 13 beginning page fs44 information related properties plant equipment segment contained note 14 page fs46 note 9 litigation chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party 70 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater resolution actions may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period company use mtbe manufacture gasoline united states note 10 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations facilities leases classified operating leases capitalized pay fs42 note 10 lease commitments continued ments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2005 2004 2003 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2005 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 11 restructuring reorganization costs connection unocal acquisition company implemented restructuring reorganization program part effort capture synergies combined companies program expected substantially completed end 2006 aimed eliminating redundant operations consolidating offices facilities sharing common services functions part restructuring reorganization approximately 700 positions preliminarily identified elimination positions united states relate primarily corporate upstream executive administrative functions yearend 2005 approximately 250 employees terminated accrual 106 established part purchaseprice allocation unocal payments accrual 2005 62 balance yearend 2005 classified current liability consolidated balance sheet adjustments accrual may occur future periods implementation plans finalized estimates refined result various reorganizations restructurings across several businesses corporate departments company recorded beforetax charges 258 146 tax 2003 estimated termination benefits approximately 4500 employees nearly half liability related global downstream segment substantially employee reductions occurred early 2006 activity company’s liability related reorganizations restructurings summarized following table december 31 2005 amount classified current liability consolidated balance sheet associated charges credits period categorized “operating expenses” “selling general administrative expenses” consolidated statement income fs43 notes consolidated financial statements millions dollars except pershare amounts note 12 assets held sale discontinued operations december 31 2004 company classified 162 net properties plant equipment “assets held sale” consolidated balance sheet assets category related group service stations outside united states summarized income statement information relating discontinued operations follows assets sold disposed classified discontinued operations mainly cash flows assets eliminated ongoing operations company note 13 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost follows descriptions major affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period hamaca chevron 30 percent interest hamaca heavy oil production upgrading project located venezuela’s orinoco belt gs caltex corporation chevron owns 50 percent gs caltex formerly lg caltex oil corporation joint venture gs holdings joint venture originally formed 1967 lg group caltex imports refines markets petroleum products petrochemicals south korea caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium provides critical export route crude oil tco karachaganak fs44 note 13 investments advances continued star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery map ta phut thailand petroleum authority thailand owns remaining 36 percent sprc caltex australia ltd chevron 50 percent equity ownership interest caltex australia limited cal remaining 50 percent cal publicly owned december 31 2005 fair value chevron’s share cal common stock approximately 1900 aggregate carrying value company’s investment cal approximately 70 lower amount underlying equity cal net assets colonial pipeline company chevron owns approximate 23 percent equity interest result unocal acquisition colonial pipeline system runs texas new jersey transports petroleum products 13state market chevron phillips chemical company llc chevron owns 50 percent cpchem formed 2000 chevron merged petrochemicals businesses phillips petroleum company conocophillips corporation december 31 2005 company’s carrying value investment cpchem approximately 100 lower amount underlying equity cpchem’s net assets dynegy inc chevron owns approximate 24 percent equity interest common stock dynegy provider electricity markets customers throughout united states company also holds investments dynegy preferred stock investment dynegy common stock december 31 2005 carrying value company’s investment dynegy common stock approximately 300 amount 200 company’s proportionate interest dynegy’s underlying net assets difference primarily result writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors contributing decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly appropriate reflect difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2005 approximately 470 investment dynegy preferred stock refer note 7 beginning page fs39 discussion investment information “sales operating revenues” consolidated statement income includes 8824 7933 6308 affiliated companies 2005 2004 2003 respectively “purchased crude oil products” includes 3219 2548 1740 affiliated companies 2005 2004 2003 respectively “accounts notes receivable” consolidated balance sheet includes 1729 1188 due affiliated companies december 31 2005 2004 respectively “accounts payable” includes 249 192 due affiliated companies december 31 2005 2004 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share fs45 notes consolidated financial statements millions dollars except pershare amounts note 14 properties plant equipment12 refer note 24 beginning page fs59 discussion effect 2003 ppe balances depreciation expenses related adoption fas 143 “accounting asset retirement obligations” 2005 balances include assets acquired connection acquisition unocal corporation refer note 2 beginning page fs36 additional information net dry hole expense related prior years’ expenditures 28 58 124 2005 2004 2003 respectively depreciation expense includes accretion expense 187 93 132 2005 2004 2003 respectively depreciation expense includes discontinued operations 22 58 2004 2003 respectively primarily mining operations coal minerals power generation businesses real estate assets management information systems note 15 accounting buysell contracts first quarter 2005 securities exchange commission sec issued comment letters chevron companies oil gas industry requesting disclosure information related accounting buysell contracts buysell contract company agrees buy specific quantity quality commodity delivered specific location simultaneously agreeing sell specified quantity quality commodity different location counterparty physical delivery occurs side transaction risk reward ownership evidenced title transfer assumption environmental risk transportation scheduling credit risk nonperformance counterparty parties settle side buysell separate invoicing company routinely enters buysell contracts primarily united states downstream business associated crude oil refined products crude oil contracts used facilitate company’s crude oil marketing activity includes purchase sale crude oil production fulfillment company’s supply arrangements physical delivery location crude oil specifications purchase crude oil supply company’s refining system refined products buysell arrangements used help fulfill company’s supply agreements customer locations specifications company historically accounted buysell transactions consolidated statement income monetary transaction purchases reported “purchased crude oil products” sales reported “sales operating revenues” sec raised issue whether accounting buysell contracts shown net income statement accounted provisions accounting principles board apb opinion 29 “accounting nonmonetary transactions” apb 29 company understands others oil gas industry may report buysell transactions net basis income statement rather gross emerging issues task force eitf fasb deliberated topic issue 0413 “accounting purchases sales inventory counterparty” september 2005 meeting eitf reached consensus two legally separate exchange transactions counterparty including buysell transactions combined considered single arrangement purposes applying apb 29 transactions entered “in contemplation” one another eitf 0413 ratified fasb september 2005 effective fs46 note 15 accounting buysell contracts continued new arrangements modifications renewals existing arrangements entered beginning april 1 2006 effective date company’s adoption standard upon adoption company report net effect buysell transactions consolidated statement income “purchased crude oil products” instead reporting revenues associated arrangements “sales operating revenues” costs “purchased crude oil products” issue deliberation eitf sec staff directed chevron companies disclose face income statement amounts associated buysell contracts discuss footnote financial statements basis underlying accounting amounts buysell contracts shown company’s consolidated statement income “sales operating revenues” three years ending december 31 2005 23822 18650 14246 respectively revenue amounts associated buysell contracts represented 12 percent total “sales operating revenues” 2005 2004 2003 nearly revenue amounts period associated buysell contracts pertain company’s downstream segment costs associated buysell revenue amounts included “purchased crude oil products” consolidated statement income period note 16 taxes excludes income tax expense 100 50 related discontinued operations 2004 2003 respectively excludes us deferred tax benefit 191 foreign deferred tax expense 170 associated adoption fas 143 2003 related cumulative effect changes accounting method 2003 2005 beforetax income us operations including related corporate charges 6733 compared beforetax income 7776 5664 2004 2003 respectively international operations beforetax income 18464 12775 7012 2005 2004 2003 respectively us federal income tax expense reduced 289 176 196 2005 2004 2003 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate explained table company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following 2005 reported amount net total deferred taxes increased approximately 5000 amount reported 2004 increase largely attributable net deferred taxes arising unocal acquisition deferred tax assets related foreign tax credits increased approximately 1000 2004 2005 associated valuation allowance also increased approximately amount change categories reflected addition unocal amounts well effect company’s tax election 2005 certain heritagechevron international upstream operations fs47 notes consolidated financial statements millions dollars except pershare amounts note 16 taxes continued overall valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences benefit expected realized tax loss carryforwards exist many foreign jurisdictions whereas tax loss carry forwards expiration date others expire various times 2006 2013 foreign tax credit carryforwards 1145 expire 2015 december 31 2005 2004 deferred taxes classified consolidated balance sheet follows company’s policy subsidiaries included us consolidated tax return record income tax expense though file separately parent recording adjustment income tax expense effects consolidation income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 14317 december 31 2005 significant majority amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested american jobs creation act 2004 october 2004 american jobs creation act 2004 passed law act provides deduction income qualified domestic refining upstream production activities phased 2005 2010 income company expects net effect provision act result decrease federal effective tax rate 2006 approximately 34 percent based current earnings levels long term company expects new deduction result decrease annual effective tax rate 32 percent category income based current earnings levels taxes income follows includes taxes discontinued operations 3 5 2004 2003 respectively note 17 shortterm debt weightedaverage interest rates december 31 2005 2004 418 percent 198 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 7 beginning page fs39 information concerning company’s debtrelated derivative activities december 31 2005 company 4850 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate bank prime rate amounts outstanding credit agreements 2005 yearend fs48 note 17 shortterm debt continued december 31 2005 2004 company classified 4850 4735 respectively shortterm debt longterm settlement obligations expected require use working capital 2006 company intent ability refinance debt longterm basis note 18 longterm debt chevron three “shelf” registration statements file sec together would permit issuance 3800 debt securities pursuant rule 415 securities act 1933 total longterm debt excluding capital leases december 31 2005 11807 included 1861 assumed connection acquisition unocal company’s longterm debt outstanding yearend 2005 2004 follows debt assumed acquisition unocal 2005 guarantee esop debt less 100 individually weightedaverage interest rate december 31 2005 consolidated longterm debt maturing december 31 2005 follows 2006 467 2007 2287 2008 856 2009 782 2010 176 2010 2856 october 2005 company fully redeemed pure resources 7125 percent senior notes due 2011 395 company’s 150 texaco brasil zero coupon notes paid maturity november 2005 december 2005 company exercised par call redemption 200 texaco capital inc 57 percent notes due 2008 january 2005 company contributed 98 permit esop make principal payment 113 note 19 new accounting standards fasb statement 151 “inventory costs amendment arb 43 chapter 4” fas 151 november 2004 fasb issued fas 151 became effective company january 1 2006 standard amends guidance accounting research bulletin arb 43 chapter 4 “inventory pricing” clarify accounting abnormal amounts idle facility expense freight handling costs spoilage addition standard requires allocation fixed production overheads costs conversion based normal capacity production facilities adoption standard impact company’s results operations financial position liquidity eitf issue 046 “accounting stripping costs incurred production mining industry” issue 046 march 2005 fasb ratified earlier eitf consensus issue 046 effective company january 1 2006 stripping costs removing overburden waste materials access mineral deposits consensus calls stripping costs incurred mine goes production treated variable production costs considered component mineral inventory cost subject arb 43 “restatement revision accounting research bulletins” adoption accounting coal oil sands mining operations significant effect company’s results operations financial position liquidity note 20 accounting suspended exploratory wells refer note 1 beginning page fs34 section “properties plant equipment” discussion company’s accounting policy cost exploratory wells company’s suspended wells reviewed context quarterly basis april 2005 fasb issued fasb staff position fsp fas 191 “accounting suspended well costs” amended fas 19 “financial accounting reporting oil gas producing companies” company elected early application guidance first quarter 2005 financial statements provisions fsp fas 191 exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b enterprise making sufficient progress assessing reserves economic operating viability project fs49 notes consolidated financial statements millions dollars except pershare amounts note 20 accounting suspended exploratory wells continued either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fsp provides number indicators assist entity demonstrate sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratorywell costs three years ended december 31 2005 capitalized exploratory well costs charged expense upon adoption fsp fas 191 amounts may differ previously disclosed due requirements fsp fas 191 exclude costs suspended expensed annual period represent property sales exchange following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling aging former unocal wells based date drilling completed rather chevron’s august 2005 acquisition unocal certain projects multiple wells fields 850 exploratory well costs capitalized period greater one year december 31 2005 approximately 313 20 projects related projects drilling activities way firmly planned near future additional 63 four projects drilling activity dur ing 2005 474 balance related 16 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 474 referenced following activities associated assessing reserves projects’ economic viability 141 additional seismic interpretation planned frontend engineering design feed expected commence 2007 two projects b 82 evaluation drilling results prefeed studies ongoing feed expected commence 2006 one project c 74 finalization preunit agreement operator adjacent field progression joint subsurface joint concept selection studies feed expected begin 2006 one project 63 feed contracts executed 2005 continued marketing equity natural gas two projects e 114 miscellaneous activities 10 projects smaller amounts suspended progress made projects category decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 850 suspended well costs capitalized period greater one year december 31 2005 represents 105 exploratory wells 40 projects tables contain aging costs well project basis exploratory wells costs greater one year note 21 employee benefit plans company definedbenefit pension plans many employees company typically prefunds definedbenefit plans required local regulations certain situations prefunding provides economic advantages united states qualified taxexempt plans subject employee retirement income security act erisa minimum funding standard company typically fund domestic nonqualified taxexempt pension plans subject funding requirements laws regulations contributions pension plans may fs50 note 21 employee benefit plans continued less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs retiree medical coverage company’s main us plan increase company contributions retiree medical coverage limited 4 percent year effective retirement beginning 2005 certain life insurance benefits paid company annual contributions based actual plan experience company uses measurement date december 31 value pension postretirement benefit plan obligations status company’s pension postretirement benefit plans 2005 2004 follows company recorded additional minimum liabilities 435 66 2005 us international plans respectively 530 64 2004 us international plans respectively reflect amount unfunded accumulated benefit obligations longterm portion accrued benefits liability recorded “reserves employee benefit plans” shortterm portion reflected “accrued liabilities” “accumulated comprehensive income” includes deferred income taxes 148 22 2005 us international plans respectively 181 21 2004 us international plans respectively item presented net taxes consolidated statement stockholders’ equity fs51 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued accumulated benefit obligations us international pension plans 7931 3080 respectively december 31 2005 6117 2734 respectively december 31 2004 information us international pension plans accumulated benefit obligation excess plan assets december 31 2005 2004 components net periodic benefit cost 2005 2004 2003 assumptions following weighted average assumptions used determine benefit obligations net period benefit costs years ended december 31 discount rate expected rate return plan assets reviewed updated needed quarterly basis main us pension plan 2005 discount rate expected return plan assets rate compensation increase reflect remeasurement unocal benefit plans july 31 2005 due acquisition unocal expected return plan assets company employs rigorous process determine estimates longterm rate return pension assets estimates primarily driven actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 72 percent company’s pension plan assets december 31 2005 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets measurement date used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2005 company selected fs52 note 21 employee benefit plans continued 55 percent discount rate shown table page fs52 based moody’s aa corporate bond index cash flow analysis using citigroup pension discount curve discount rates end 2004 2003 58 percent 6 percent respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2005 main us postretirement medical plan assumed health care cost trend rates start 10 percent 2006 gradually decline 5 percent 2011 beyond measurement december 31 2004 assumed health care cost trend rates started 95 percent 2005 gradually declined 48 percent 2010 beyond measurements increases company’s contributions capped 4 percent effective retirement assumed health care costtrend rates significant effect amounts reported retiree health care costs onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy company’s pension plan weightedaverage asset allocations december 31 asset category follows pension plans invest primarily asset categories sufficient size liquidity cost efficiency permit investments reasonable size pension plans invest asset categories provide diversification benefits easily measured assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors established following approved asset allocation ranges equities 4070 percent fixed income 2060 percent real estate 015 percent 05 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset category risk equities include investments company’s common stock amount 13 8 december 31 2005 2004 respectively “other” asset category includes minimal investments privateequity limited partnerships cash contributions benefit payments 2005 company contributed 794 228 us international pension plans respectively 2006 company expects contributions approximately 300 200 us international pension plans respectively actual contribution amounts dependent upon planinvestment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 220 2006 compared 226 paid 2005 following benefit payments include estimated future service expected paid company next ten years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop discussed total company matching contributions employee accounts within esip 145 139 136 2005 2004 2003 respectively cost reduced value shares released lesop totaling 4 138 23 2005 2004 2003 respectively remaining amounts totaling 141 1 113 2005 2004 2003 respectively represent open market purchases employee stock ownership plan within chevron employee savings investment plan esip employee stock ownership plan esop 1989 chevron established leveraged employee stock ownership plan lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted american institute certified public accountants aicpa statement position 936 “employers’ accounting employee stock ownership plans” company elected continue practices based aicpa statement position 763 “accounting practices certain employee stock ownership plans” subsequent consensus eitf fasb debt lesop fs53 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total expenses credits recorded lesop 94 29 24 2005 2004 2003 respectively including 18 23 28 interest expense related lesop debt charge credit compensation expense 76 52 4 dividends paid lesop shares 55 52 61 used 2005 2004 2003 respectively service lesop debt included 2004 amount repayment debt entered 1999 pay interest esop debt interest expense debt recognized reported lesop interest expense 1999 addition company made contributions 2005 2003 98 26 respectively satisfy lesop debt service excess dividends received lesop contributions required 2004 dividends received lesop sufficient satisfy lesop debt service shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2005 2004 follows benefit plan trusts texaco established benefit plan trust funding obligations benefit plans yearend 2005 trust contained 142 million shares chevron treasury stock company intends continue pay obligations benefit plans trust sell shares use dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2005 trust assets totaled 130 invested primarily interestearning accounts management incentive plans chevron two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred recipients conversion stock units investment fund alternatives aggregate charges expense mip 155 147 125 2005 2004 2003 respectively awards ltip consist stock options sharebased compensation described fully note 22 incentive plans company program provides eligible employees covered mip ltip annual cash bonus company achieves certain financial safety goals additionally august 2005 company assumed responsibility remaining prorated cash bonuses unocal annual incentive plan charges programs 324 339 151 2005 2004 2003 respectively note 22 stock options sharebased compensation effective july 1 2005 company adopted provisions financial accounting standards board fasb statement 123r “sharebased payment” fas 123r sharebased compensation plans company previously accounted plans recognition measurement principles accounting principles board apb opinion 25 “accounting stock issued employees” apb 25 related interpretations disclosure requirements established fas 123 “accounting stockbased compensation” company adopted fas 123r using modified prospective method accordingly results prior periods restated refer note 1 beginning page fs34 pro forma effect net income earnings per share company applied fairvalue recognition fas 123 periods prior adoption fas 123r actual effect net income earnings per share periods adoption fas 123r 2005 compensation expense charged income first time stock options 65 42 tax addition compensation expense charged income stock appreciation rights performance units restricted stock units 59 39 tax 65 42 tax 25 16 tax 2005 2004 2003 respectively significant capitalized stockbased compensation costs december 31 2005 cash received option exercises sharebased payment arrangements 2005 2004 2003 297 385 32 respectively actual tax benefits realized tax deductions option exercises 71 49 6 2005 2004 2003 respectively fs54 note 22 stock options sharebased compensation continued cash paid settle performance units stock appreciation rights 110 23 11 2005 2004 2003 respectively cash paid 2005 included 73 million unocal awards paid changeincontrol plan provisions adoption fas 123r impact measuring stock appreciation rights fair value instead intrinsic value resulted insignificant charge income third quarter 2005 restricted stock units fas 123r required unrecognized compensation amounts presented “deferred compensation benefit plan trust” consolidated balance sheet reclassified appropriate equity accounts resulted reclassification 7 “capital excess par value” prior adoption fas 123r company presented tax benefits deductions resulting exercise stock options operating cash flows consolidated statement cash flows fas 123r requires cash flow resulting tax deductions excess compensation cost recognized options excess tax benefits classified financing cash flows refer note 3 beginning page fs37 information excess tax benefits november 2005 fasb issued staff position fas 123r3 fsp fas 123r3 “transition election related accounting tax effects sharebased payment awards” provides onetime transition election companies follow calculating beginning balance pool excess tax benefits related employee compensation simplified method determine subsequent impact pool employee awards fully vested outstanding upon adoption fas 123r fsp company must decide november 2006 whether make onetime transition election may provide administrative relief calculating future tax effects stock option issuances whether onetime election made company anticipates significant difference amount tax expense recorded future periods discussion references share price number shares adjusted twoforone stock split september 2004 chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants 10year period april 2004 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient stock options stock appreciation rights granted ltip extend 10 years grant date effective options granted june 2002 onethird award vests first second third anniversaries date grant prior change options granted chevron vested one year date grant performance units granted ltip extend 3 years grant date settled cash end period settlement amounts based achievement performance targets relative major competitors period payments indexed company’s stock price texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options retained provision restored enables participant exercises stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted apart restored options awards may granted former texaco plans unocal sharebased plans unocal plans closing acquisition unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options conversion ratio 107 chevron shares unocal share awards retained provisions original unocal plans awards issued prior 2004 generally may exercised 3 years termination employment depending upon terms individual award agreements original expiration date whichever earlier awards issued since 2004 generally remain exercisable end normal option term termination employment occurs prior august 10 2007 awards issued unocal plans including restricted stock units restricted stock units performance shares became vested acquisition date shares cash issued recipients accordance changeincontrol provisions plans fs55 notes consolidated financial statements millions dollars except pershare amounts note 22 stock options sharebased compensation continued fair market values stock options stock appreciation rights granted 2005 2004 2003 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term represents options converted acquisition date summary option activity ltip well former texaco unocal plans presented includes fullyvested chevron options exchanged outstanding unocal options total intrinsic value ie difference exercise price market price options exercised 2005 2004 2003 258 129 17 respectively adoption fas 123r company elected amortize newly issued graded awards straightline basis requisite service period accordance fas 123r implementation guidance issued staff securities exchange commission company accelerates vesting period retirementeligible employees accordance vesting provisions company’s sharebased compensation programs awards issued adoption fas 123r december 31 2005 89 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period 23 years january 1 2005 number ltip performance units outstanding equivalent 2673482 shares 2005 709900 units granted 1012932 units vested cash proceeds distributed recipients 24434 units forfeited december 31 2005 units outstanding 2346016 value liability recorded instruments 83 addition outstanding stock appreciation rights awarded various ltip former texaco unocal programs totaled approximately 800000 equivalent shares december 31 2005 liability 16 recorded awards broadbased employee stock options addition plans described chevron granted eligible employees stock options equivalents 1998 options vested two years february 2000 expire 10 years february 2008 total 9641000 options awarded exercise price 3815625 per share fair value option date grant estimated 954 using blackscholes model preceding 10 years assumptions used model based 10year average riskfree interest rate 7 percent dividend yield 42 percent expected life 7 years volatility 247 percent january 1 2005 number broadbased employee stock options outstanding 2109504 2005 exercises 397500 shares forfeitures 29100 shares reduced outstanding options 1682904 december 31 2005 instruments aggregate intrinsic value 31 remaining contractual term options 21 years total intrinsic value options exercised 2005 2004 9 16 respectively exercises 2003 insignificant note 23 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally finalized individual taxing authorities several years end annual period income taxes calculated us federal income tax liabilities settled 1996 chevron formerly chevrontexaco corporation 1997 chevron global fs56 note 23 contingencies commitments continued energy inc formerly caltex corporation unocal corporation unocal texaco inc texaco california franchise tax liabilities settled 1991 chevron 1998 unocal 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees december 31 2005 company subsidiaries provided either directly indirectly guarantees 985 notes contractual obligations affiliated companies 294 third parties described major category material amounts carried liabilities company’s obligations guarantees 985 guarantees provided affiliates 806 related borrowings capital projects general corporate purposes guarantees undertaken achieve lower interest rates generally cover construction periods capital projects included amounts unocalrelated guarantees approximately 230 associated construction completion guarantee debt financing unocal’s equity interest bakutbilisiceyhan btc crude oil pipeline project approximately 95 percent 806 guaranteed expire 2006 2010 remaining guarantees expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed recourse provisions assets held collateral guarantees 179 represent obligations connection pricing powerpurchase agreements certain company’s cogeneration affiliates terms guarantees company may required make payments certain conditions affiliates perform agreements provisions recourse third parties assets held collateral pricing guarantees 294 guarantees provided third parties approximately 150 related construction loans host governments certain company’s international upstream operations remaining guarantees 144 provided principally conditions sale company’s interest certain operations provide source liquidity guaranteed parties connection company marketing programs amounts company’s obligations guarantees recorded liabilities 85 percent 294 guarantees expire 2010 remainder expiring 2010 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed approximately 85 guarantees recourse provisions enable company recover payments made terms guarantees securities held guaranteed parties’ assets december 31 2005 chevron also outstanding guarantees 190 equilon debt leases following february 2002 disposition interest equilon company received indemnification shell oil company shell claims arising guarantees company recorded liability guarantees approximately 50 percent amounts guaranteed expire within 2006 2010 period guarantees remaining amounts expiring 2019 indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 end 2005 company paid approximately 38 indemnities company expects receive additional requests indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred periods texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon indemnities must asserted either early february 2007 later february 2009 claims relating motiva must asserted later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets unocal’s 76 products company business existed prior sale 1997 terms indemnities maximum limit amount potential future payments company however purchaser shares certain costs indemnity aggregate cap 200 claims relating indemnities must asserted april 2022 end 2005 fs57 notes consolidated financial statements millions dollars except pershare amounts note 23 contingencies commitments continued approximately 113 applied cap includes payments made either unocal chevron totaling 80 securitization company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2005 approximately 1200 representing 7 percent chevron’s total current accounts receivables balance securitized chevron’s total estimated financial exposure securitizations december 31 2005 approximately 60 arrangements effect accelerating chevron’s collection securitized amounts event spes experience major defaults collection receivables chevron believes would loss exposure connected thirdparty investments securitizations longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments throughput agreements takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2006 2200 2007 1900 2008 1800 2009 1800 2010 500 2011 3800 total payments agreements approximately 2100 2005 1600 2004 1400 2003 significant takeorpay agreement calls company purchase approximately 55000 barrels per day refined products equity affiliate refiner thailand purchase agreement conjunction financing refinery owned affiliate expires 2009 future estimated commitments contract 2006 1300 2007 1300 2008 1300 2009 1300 terms 2004 agreement company exercised option 2005 acquire additional regasification capacity sabine pass liquefied natural gas terminal payments 25 billion 20year period expected commence 2009 minority interests company commitments approximately 200 related minority interests subsidiary companies environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemical petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2005 1469 included balance liabilities assumed connection acquisition unocal relate primarily sites previously divested closed unocal sites included limited former refineries transportation distribution facilities service stations crude oil natural gas fields mining operations well active mining operations company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2005 recorded liability material company’s financial position results operations liquidity included yearend 2005 balance 139 related sites chevron identified us environmental protection agency regulatory agencies provisions federal superfund law analogous state laws “potentially responsible party” otherwise involved remediation remaining yearend 2005 environmental reserves balance 1330 855 related approximately 2250 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 475 associated various sites international downstream 101 upstream 257 chemicals 50 67 liabilities sites whether operating closed divested primarily associated company’s plans activities fs58 note 23 contingencies commitments continued remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants global operations chevron affiliates conduct business activities approximately 180 countries areas company affiliates significant operations include united states canada australia united kingdom norway denmark france netherlands partitioned neutral zone kuwait saudi arabia republic congo angola nigeria chad south africa democratic republic congo indonesia bangladesh philippines myanmar singapore china thailand vietnam cambodia azerbaijan kazakhstan venezuela argentina brazil colombia trinidad tobago south korea company’s caspian pipeline consortium cpc affiliate operates russia kazakhstan company’s tengizchevroil tco affiliate operates kazakhstan affiliate company participates development bakutbilisiceyhan btc pipeline azerbaijan georgia turkey also affiliate company interest chadcameroon pipeline company’s petrolera ameriven affiliate operates hamaca project venezuela company’s cpchem affiliate manufactures markets wide range petrochemicals worldwide basis manufacturing facilities united states puerto rico singapore china south korea saudi arabia qatar mexico belgium company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken host governments increase public ownership company’s partially wholly owned businesses assets impose additional taxes royalties company’s operations certain locations host governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest acts violence strained relations host government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones chevron estimates maximum possible net beforetax liability approximately 200 time possible maximum net amount could owed chevron estimated 50 timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies host governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 24 asset retirement obligations company adopted financial accounting standards board statement fasb 143 “accounting asset retirement obligations” fas 143 effective january 1 2003 accounting standard applies fair value liability asset retirement obligation recorded legal obligation associated retirement tangible longlived asset liability reasonably estimated obligations associated retirement assets require recognition certain circumstances 1 present value liability offsetting asset aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates fas 143 primarily affects company’s accounting crude oil natural gas producing assets differs several respects previous accounting fas 19 “financial accounting reporting oil gas producing companies” first quarter 2003 company recorded net aftertax charge 200 cumulative effect adoption fas 143 including company’s share amounts attributable equity affiliates cumulativeeffect adjustment also increased following balance sheet categories “properties plant equipment” 2568 “accrued liabilities” 115 “deferred credits noncurrent fs59 notes consolidated financial statements millions dollars except pershare amounts note 24 asset retirement obligations continued obligations” 2674 “noncurrent deferred income taxes” decreased 21 upon adoption significant asset retirement obligations associated legal obligations retire refining marketing transportation downstream chemical longlived assets generally recognized indeterminate settlement dates asset retirements prevented estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation cumulativeeffect net charge effect new accounting standard net income 2003 materially different result would fas 19 accounting included “depreciation depletion amortization” 52 related depreciation aro asset 132 related accretion aro liability march 2005 fasb issued fasb interpretation 47 “accounting conditional asset retirement obligations interpretation fasb statement 143” fin 47 effective company december 31 2005 fin 47 clarifies phrase “conditional asset retirement obligation” used fas 143 refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control company obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement uncertainty timing andor method settlement conditional asset retirement obligation factored measurement liability sufficient information exists fas 143 acknowledges cases sufficient information may available reasonably estimate fair value asset retirement obligation fin 47 also clarifies entity would sufficient information reasonably estimate fair value asset retirement obligation adopting fin 47 company recognize additional liabilities conditional retirement obligations due inability reasonably estimate fair value obligations indeterminate settlement dates following table indicates changes company’s beforetax asset retirement obligations 2005 2004 2003 includes cumulative effect accounting change fs60 note 25 earnings per share basic earnings per share eps based upon net income less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs see note 22 “stock options sharebased compensation” beginning page fs54 following table sets forth computation basic diluted eps 2003 amount company’s share capital stock transaction dynegy affiliate applicable accounting rules recorded directly retained earnings includes net loss 200 adoption fas 143 net gain 4 company’s share dynegy’s cumulative effect adoption eitf 023 share amounts periods reflect twoforone stock split effected 100 percent stock dividend september 2004 fs61 notes consolidated financial statements millions dollars except pershare amounts note 26 common stock split july 28 2004 company’s board directors approved twoforone stock split form stock dividend company’s stockholders record august 19 2004 distribution shares september 10 2004 total number authorized common stock shares associated par value unchanged action pershare amounts financial statements reflect stock split periods presented effect common stock split reflected consolidated balance sheet “common stock” “capital excess par value” note 27 financial information net income 2004 included gains approximately 12 billion relating sale nonstrategic upstream properties financial information follows includes 2 13 96 2005 2004 2003 respectively company’s share equity affiliates’ foreign currency effects excess market value carrying value inventories lifo method used 4846 3036 2106 december 31 2005 2004 2003 respectively market value generally based average acquisition costs year lifo profits 34 36 82 included net income years 2005 2004 2003 respectively fs62 page intentionally left blank fs63 fiveyear financial summary fiveyear financial summary unaudited pershare amounts periods reflect twoforone stock split effected 100 percent stock dividend september 2004 amount 2003 includes benefit 008 company’s share capital stock transaction dynegy inc affiliate applicable accounting rules recorded directly retained earnings included net income period fs64 supplemental information oil gas producing activities supplemental information oil gas producing activities unaudited accordance statement fas 69 “disclosures oil gas producing activities” section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo asiapacific geographic area includes activities principally australia azerbaijan bangladesh china kazakhstan myanmar table costs incurred exploration property acquisitions development1 includes costs incurred whether capitalized expensed excludes general support equipment expenditures see note 24 “asset retirement obligations” beginning page fs59 includes wells equipment facilities associated proved reserves include properties acquired property exchanges included proved property acquisitions unocal 845 aro assets composed gulf mexico 115 us 271 africa 9 asiapacific 366 indonesia 25 international 59 includes 160 63 costs incurred prior assignment proved reserves 2005 2004 respectively fs65 supplemental information oil gas producing activities continued partitioned neutral zone kuwait saudi arabia papua new guinea sold 2003 philippines thailand international “other” geographic category includes activities argentina brazil canada colombia denmark germany netherlands norway trinidad tobago venezuela united kingdom countries amounts shown affiliated companies chevron’s 50 percent equity share tco exploration production partnership operating republic kazakhstan 30 percent equity share hamaca exploration production partnership operating venezuela amounts tables exclude cumulative effect adjustment adoption fas 143 “asset retirement obligations” discussed note 24 beginning page fs59 table ii capitalized costs related oil gas producing activities1 includes assets held sale see note 24 “asset retirement obligations” beginning page fs59 fs66 table ii capitalized costs related oil gas producing activities1 continued includes assets held sale 2003 reclassified conform 2005 presentation see note 24 “asset retirement obligations” beginning page fs59 fs67 supplemental information oil gas producing activities continued table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2005 2004 2003 shown following table net income exploration production activities reported page fs41 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs41 value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” beginning page fs59 includes net sulfur income foreign currency transaction gains losses certain significant impairment writedowns 2004 2003 miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified management’s discussion analysis pages fs7 fs11 include results lngrelated activities fs68 table iii results operations oil gas producing activities1 continued value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations 2003 includes certain reclassifications conform 2005 presentation represents accretion aro liability refer note 24 “assets retirement obligation” beginning page59 includes net sulfur income foreign currency transaction gains losses certain significant impairment writedowns miscellaneous expenses etc also includes net income related oil gas activities oil gas reserves attributed example net income technical operating service agreements items identified management’s discussion analysis pages fs7 fs11 fs69 supplemental information oil gas producing activities continued table iv results operations oil gas producing activities unit prices costs12 value owned production consumed lease fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel conformed 2005 presentation exclude taxes table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly executive vice president responsible company’s worldwide exploration production activities rac members knowledgeable sec guidelines proved reserves classification rac coordinates activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities provide independent reviews business units’ recommended reserve changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves fs70 table v reserve quantity information continued year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee executive committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination proved reserve records documentation alignment corporate reserves manual reserve quantities december 31 2005 oilequivalent reserves company’s consolidated operations totaled 90 billion barrels refer page e11 definition oilequivalent reserves nearly 22 percent total united states yearend reserves approximately 14 billion barrels associated properties obtained part august 2005 acquisition unocal company’s interests equity affiliates oilequivalent reserves totaled 29 billion barrels 84 percent associated company’s 50 percent ownership tco aside tco operations single property accounted 5 percent company’s total oilequivalent proved reserves fewer 20 individual properties contained 1 percent 5 percent total aggregate properties accounted 35 percent company’s total proved oilequivalent reserves properties geographically dispersed located united states south america europe west africa middle east asiapacific region united states total oilequivalent reserves yearend 2005 26 billion barrels amount 39 percent 21 percent 40 percent located california gulf mexico us areas respectively california liquids reserves represented 95 percent total classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region liquids represented approximately 63 percent total oilequivalent reserves production operations mostly offshore result also capital intensive costs include investments wells production platforms facilities gathering lines storage facilities us areas reserves split equally liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection pattern net reserve changes shown following tables three years ending december 31 2005 necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things matters outside company’s control delays government permitting partner approvals development plans declines oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved underground oil natural gas reserves changes thereto years 2003 2004 2005 shown tables pages fs72 fs74 fs71 supplemental information oil gas producing activities continued table v reserve quantity information continued net proved reserves crude oil condensate natural gas liquids includes reserves acquired property exchanges includes reserves disposed property exchanges net reserve changes excluding production 2005 consist 490 million barrels developed reserves 170 million barrels undeveloped reserves consolidated companies 178 million barrels developed reserves 154 million barrels undeveloped reserves affiliated companies 2005 percentages undeveloped reserves december 31 2004 transferred developed reserves 11 percent 20 percent consolidated companies affiliated companies respectively information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevron significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevron views reserves development integral part total upstream operations however sec regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 146 million barrels december 31 2005 oil sands reserves considered standardized measure discounted future net cash flows conventional oil gas reserves found page fs76 noteworthy amounts categories provedreserve changes 2003 2005 table discussed revisions 2003 net revisions increased reserves 57 million barrels consolidated companies whereas net us reserve changes minimal international volumes increased 66 million barrels largest increase kazakhstan asiapacific area based updated geologic model one field 200millionbarrel increase tco based updated model reservoir well performance 2004 net revisions decreased reserves 218 million barrels consolidated companies increased reserves affiliates 204 million barrels consolidated companies decrease composed 161 million barrels international areas 57 million barrels united states largest downward revision internationally 70 million barrels africa one field angola accounted majority net decline changes made oilinplace estimates based reservoir performance data one field asiapacific area essentially accounted 43millionbarrel downward revision region revision associated reduced well performance part 36millionbarrel net downward revision indonesia associated effect higher yearend prices calculation reserves costoil recovery fs72 table v reserve quantity information continued productionsharing contract united states 68millionbarrel net downward revision gulf mexico area across several fields based mainly reservoir analyses assessments well performance affiliated companies 206millionbarrel increase tco based updated assessment reservoir performance tengiz field partially offsetting increase downward effect higher yearend prices variable royaltyrate calculation downward revisions also occurred geographic areas effect higher yearend prices various productionsharing terms variable royalty calculations 2005 net revisions reduced reserves 239 million 24 million barrels worldwide consolidated companies equity affiliates respectively consolidated companies net decrease 199 million barrels international areas 40 million barrels united states largest downward net revisions internationally 108 million barrels indonesia 53 million barrels kazakhstan due primarily effect higher yearend prices calculation reserves associated productionsharing variableroyalty contracts united states 40millionbarrel reduction across many fields geographic sections downward revision affiliated companies 19millionbarrel reduction hamaca attributable revised government royalty provisions tco downward effect higher yearend prices partially offset increased reservoir performance improved recovery 2005 improved recovery increased liquids volumes worldwide 203 million barrels consolidated companies international areas accounted 142 million barrels increase indonesia added 42 million barrels due improved performance reserve additions 67 million barrels africa occurred primarily angola resulted infill drilling wells workovers secondary recovery gas injection additions 29 million barrels “other” international area mainly attributable improved waterflood performance offshore eastern canada increase 61 million barrels occurred united states primarily california due improved performance large heavy oil field thermal recovery extensions discoveries 2005 extensions discoveries increased liquids volumes worldwide 184 million barrels consolidated companies largest increase 49 million barrels nigeria reflecting new development drilling including agbami field among others new field developments brazil contributed another 41 million barrels discoveries united states 44millionbarrel addition associated mainly initial booking reserves blind faith field deepwater gulf mexico purchases 2005 acquisition 572 million barrels liquids related solely acquisition unocal august threefourths 376 million barrels acquired international areas represented vol umes azerbaijan thailand volumes acquired united states texas alaska sales 2004 sales liquids volumes reduced reserves consolidated companies 179 million barrels sales totaled 130 million barrels united states 33 million barrels “other” international region sales “other” region united states totaled 103 millions barrels two fields accounting approximately one half volume 27 million barrels sold gulf mexico reflect sale number shelf properties “other” international sales include disposal western canada properties several fields united kingdom sales associated company’s program dispose assets deemed nonstrategic portfolio producing properties 2005 sales 58 million barrels “other” international area related disposition former unocal operations onshore canada fs73 supplemental information oil gas producing activities continued table v reserve quantity information continued net proved reserves natural gas includes reserves acquired property exchanges includes reserves disposed property exchanges net reserve changes excluding production 2005 consist 5141 billion cubic feet developed reserves 669 billion cubic feet undeveloped reserves consolidated companies 672 billion cubic feet developed reserves 174 billion cubic feet undeveloped reserves affiliated companies 2005 percentages undeveloped reserves december 31 2004 transferred developed reserves 12 percent 19 percent consolidated companies affiliated companies respectively noteworthy amounts categories provedreserve changes 2003 2005 table discussed revisions 2003 revisions accounted net increase 1627 bcf consolidated companies net increases 2233 bcf internationally partially offset net downward revisions 606 bcf united states internationally net 879 bcf increase asiapacific region related primarily australia kazakhstan australia increase associated mainly change probabilistic method aggregating reserves multiple fields produced common offshore infrastructure single lng plant increase kazakhstan related updated geologic model one field higher gas sales thirdparty processing plant net 976 bcf increase “other” international area mainly result operating contract extensions two fields south america united states onethird net 606 bcf negative revision related two coal bed methane fields midcontinent region based performance data producing wells downward revisions balance writedown associated several fields based assessments well performance data 2004 revisions increased reserves consolidated companies net 248 bcf composed increases 928 bcf internationally decreases 680 bcf united states internationally half 346 bcf fs74 table v reserve quantity information continued increase africa related properties nigeria changes associated well performance reviews development drilling lease fuel calculations 236 bcf addition asiapacific region related primarily reservoir analysis single field 325 bcf “other” international area related new gas sales contract trinidad tobago united states net 391 bcf downward revision gulf mexico related wellperformance reviews technical analyses several fields net 316 bcf negative revision “other” us area related two coal bed methane fields midcontinent region associated wells’ performance 963 bcf increase tco connected updated analyses reservoir performance processing plant yields 2005 reserves revised downward 14 bcf consolidated companies 498 bcf equity affiliates consolidated companies negative revisions 428 bcf asiapacific region decrease attributable one field kazakhstan due mainly effects higher yearend prices variableroyalty provisions productionsharing contract reserves additions consolidated companies totaled 211 bcf 243 bcf africa “other” respectively majority african region changes angola due revised forecast fuel gas usage nigeria improved reservoir performance availability thirdparty compression colombia accounted increase “other” region revisions united states decreased reserves 9 bcf nominal increases san joaquin valley offset decreases gulf mexico “other” region tco affiliate kazakhstan reduction 547 bcf reflects updated forecast future royalties payable yearend price effects partially offset volumes added result updated assessment reservoir performance extensions discoveries 2003 extensions discoveries accounted increase 526 bcf consolidated companies reflecting 388 bcf increase united states 270 bcf added gulf mexico 118 bcf “other” region gulf mexico increase includes discoveries several offshore louisiana fields large number fields texas louisiana states accounting increase “other” 2004 extensions discoveries accounted increase 214 bcf reflecting increase united states 144 bcf 89 bcf added “other” region 54 bcf added gulf mexico drilling activities large number fields 2005 consolidated companies increased reserves 370 bcf including 167 bcf united states 118 bcf asiapacific region united states 99 bcf added “other” region 68 bcf gulf mexico primarily due drilling activities addition asiapacific resulted primarily increased drilling kazakhstan purchases 2005 except 7 bcf 5656 bcf total purchases associated unocal acquisition international reserve acquisitions 4488 bcf thailand accounting half volumes significant volumes added bangladesh myanmar sales 2004 sales consolidated companies totaled 547 bcf total 436 bcf united states 111 bcf “other” international region united states “other” region sales accounted 289 bcf reflecting disposal large number smaller properties including coal bed methane field gulf mexico sales 147 bcf reflected sale shelf properties four fields accounting onethird total sales “other” international region reflected disposition properties western canada united kingdom 2005 sales 248 bcf “other” international region related disposition formerunocal’s onshore properties canada fs75 supplemental information oil gas producing activities continued table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates proved reserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs76 table vi standardized measure discounted future net cash flows related proved oil gas reserves continued fs77 supplemental information oil gas producing activities continued table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” 2003 conformed 2004 2005 presentation fs78 exhibit index e1 filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 39 annual report form 10k schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 annual report form 10k lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 16 consolidated financial statements beginning page fs44 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day february 2007 chevron corporation david j o’reilly david j o’reilly chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day february 2007 index management’s discussion analysis consolidated financial statements supplementary data fs1 key financial results income continuing operations major operating area refer “results operations” section beginning page fs6 detailed discussion financial results major operating area three years ending december 31 2006 business environment outlook chevron’s current future earnings depend largely profitability upstream exploration production downstream refining marketing transportation business segments single biggest factor affects results operations segments movement price crude oil downstream business crude oil largest cost component refined products overall trend earnings typically less affected results company’s chemicals business activities investments earnings company period may also influenced events transactions infrequent unusual nature chevron oil gas industry large currently experiencing increase certain costs exceeds general trend inflation many areas world increase costs affecting company’s operating expenses business segments capital expenditures particularly upstream business sustain longterm competitive position upstream business company must develop replenish inventory projects offer adequate financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments changes economic legal political circumstances significant effects profitability project expected life current environment higher commodity prices certain governments sought renegotiate contracts impose additional costs company governments may attempt future company continue monitor developments take account evaluating future investment opportunities otherwise seek mitigate risks company’s current operations future prospects late february 2007 president venezuela issued decree announcing government’s intention stateowned oil company petróleos de venezuela sa increase ownership later year orinoco heavy oil associations including chevron’s 30 percentowned hamaca project minimum 60 percent impact chevron action uncertain expected material effect company’s results operations consolidated financial position liquidity company also continually evaluates opportunities dispose assets key providing sufficient longterm value acquire assets operations complementary asset base help augment company’s growth first quarter 2007 company authorized sale 31 percent ownership interest nerefco refinery associated team terminal netherlands transaction subject signing sales agreement obtaining necessary regulatory approvals company expects record gain upon close sale early 2007 company also discussions regarding possible sale fuels marketing operations netherlands belgium luxembourg neither refining marketing assets classified heldforsale december 31 2006 accordance heldforsale criteria financial accounting standards board fasb statement 144 impairment disposal longlived assets asset dispositions restructurings may occur future periods could result significant gains losses comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions may caused military conflicts civil unrest political uncertainty fs2 moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments attempts manage risks operating facilities business price levels capital exploratory costs operating expenses associated efficient production crude oil natural gas also subject external factors beyond company’s control external factors include general level inflation also prices charged industry’s product serviceproviders affected volatility industry’s supply demand conditions products services oil gas industry worldwide experienced significant price increases items 2005 2006 upward trend prices may continue 2007 capital exploratory expenditures operating expenses also affected uninsured damages production facilities caused severe weather civil unrest industry price levels crude oil generally increased first half 2006 declined second half prices end 2006 slightly lower beginning year spot price west texas intermediate wti crude oil benchmark crude oil averaged 66 per barrel 2006 increase approximately 9 per barrel 2005 average price rise crude oil prices years reflected among things increasing demand growing economies heightened level geopolitical uncertainty areas world supply concerns key producing regions early 2007 late february wti spot price averaged 56 per barrel case 2005 wide differential prices existed 2006 highquality lightsweet crude oils us benchmark wti heavier types crude price heavier crudes dampened ample supply lower relative demand due limited number refineries able process lowerquality feedstock light products ie motor gasoline jet fuel aviation gasoline diesel fuel price higherquality lightsweet crude oil remained high demand light products easily manufactured refineries lightsweet crude oil strong worldwide chevron produces heavy crude oil california chad indonesia partitioned neutral zone saudi arabia kuwait venezuela certain fields angola china united kingdom north sea refer page fs11 company’s average us international crude oil prices contrast price movements global market crude oil price changes natural gas closely aligned regional supply demand conditions united states 2006 benchmark prices henry hub averaged 650 per thousand cubic feet mcf compared 8 2005 early 2007 late february prices averaged 7 per mcf fluctuations price natural gas united states closely associated volumes produced north america inventory underground storage relative customer demand natural gas prices united states also typically higher winter period demand heating greatest contrast united states certain regions world company operates different supply demand regulatory circumstances typically resulting significantly lower average sales prices company’s production natural gas refer page fs11 company’s average natural gas prices united states international regions additionally excess supply conditions exist certain parts world cannot easily serve mitigate relatively highprice conditions united states markets lack infrastructure transport receive liquefied natural gas help address regional imbalance supply demand natural gas chevron planning increased fs3 investments longterm projects areas excess supply install infrastructure produce liquefy natural gas transport tanker along investments commitments regasify product markets demand strong supplies plentiful due significance overall investment longterm projects natural gas sales prices areas excess supply natural gas transferred companyowned thirdparty processing facility expected remain well sales prices natural gas produced much nearer areas high demand transported existing natural gas pipeline networks united states besides impact fluctuation price crude oil natural gas longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms cost goods services chevron’s worldwide net oilequivalent production 2006 including volumes produced oil sands production operating service agreement averaged 267 million barrels per day 6 percent higher production 2005 increase periods largely due volumes associated acquisition unocal august 2005 company estimates oilequivalent production 2007 average approximately 26 million barrels per day estimate subject many uncertainties including quotas may imposed opec price effect production volumes calculated costrecovery variableroyalty provisions certain contracts changes fiscal terms restrictions scope company operations production disruptions could caused severe weather local civil unrest changing geopolitics future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production chevron’s upstream investment currently made outside united states investments upstream projects generally made well advance start associated crude oil natural gas production approximately 24 percent company’s net oilequivalent production 2006 occurred opecmember countries indonesia nigeria venezuela partitioned neutral zone saudi arabia kuwait december 2006 opec admitted angola new member effective january 1 2007 oilequivalent production 2006 angola represented 6 percent company’s total october 2006 opec announced decision reduce opecmember production quotas 12 million barrels crude oil per day 44 percent production level 275 million barrels effective november 1 2006 december 2006 opec announced additional quota reduction 500000 barrels crude oil per day effective february 1 2007 opec quotas significantly affect chevron’s production level 2006 impact quotas company’s production 2007 uncertain october 2006 chevron’s boscan ll652 operating service agreements venezuela converted empresas mixtas ie joint stock contractual structures petróleos de venezuela sa majority shareholder beginning october chevron reported equity share boscan ll652 production approximately 90000 barrels per day less company previously reported operating service agreements change empresa mixta structure material effect company’s results operations consolidated financial position liquidity end 2005 certain onshore areas nigeria approximately 30000 barrels per day company’s net production capacity remained shutin following civil unrest damage production facilities occurred 2003 end 2006 company resumed operations portions affected fields 20000 barrels per day production restored early 2007 additional production restoration activities continued area however intermittent civil unrest could adversely impact company operations future refer pages fs6 fs7 additional discussion company’s upstream operations downstream earnings downstream segment closely tied global regional supply demand refined products associated effects industry refining marketing margins factors include reliability efficiency company’s refining marketing network effectiveness crudeoil productsupply functions economic returns invested capital profitability also affected volatility charter expenses company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refinery distribution network company’s core marketing areas west coast north america us gulf coast latin america asia subsaharan africa company operates ownership interests refineries areas except latin america 2006 earnings segment improved substantially mainly result higher average margins refined products improved operations company’s refineries fs4 industry margins future may volatile influenced changes price crude oil used refinery feedstock changes supply demand crude oil refined products industry supply demand balance affected disruptions refineries resulting maintenance programs unplanned outages including weatherrelated disruptions refinedproduct inventory levels geopolitical events refer pages fs8 fs9 additional discussion company’s downstream operations chemicals earnings petrochemicals business closely tied global chemical demand industry inventory levels plant capacity utilization feedstock fuel costs tend follow crude oil natural gas price movements also influence earnings segment refer page fs9 additional discussion chemicals earnings operating developments key operating developments events 2006 early 2007 included upstream united states gulf mexico company announced september 2006 completion successful production test 50 percentowned operated jack 2 well test followup 2004 jack discovery deepest welltest ever accomplished gulf mexico also gulf mexico company announced october decision develop great white tobago silvertip fields via common producing hub perdido regional host processing capacity 130000 barrels oilequivalent per day first production 38 percentowned perdido regional host anticipated 2010 company’s ownership interests fields great white 33 percent tobago 58 percent silvertip 60 percent angola june 2006 company produced first crude oil offshore lobito field located block 14 lobito part 31 percentowned operated benguela belizelobito tomboco bblt development project fields wells added next two years bblt’s maximum production expected reach approximately 200000 barrels oil per day also block 14 company produced first crude oil june 2006 landana north reservoir 31 percentowned operated tombualandana development area initial production tied back nearby bblt production facilities tombualandana company’s third deepwater development offshore angola maximum production completed tombualandana development estimated 100000 barrels per day 2010 early 2007 company announced discovery crude oil 31 percentowned operated lucapa1 well deepwater block 14 company plans conduct appraisal drilling additional geologic engineering studies assess potential resource australia july 2006 company discovered natural gas chandon1 exploration well offshore northwestern coast greater gorgon development area company’s interest property 50 percent also offshore northwestern coast company announced november 2006 significant natural gas discovery clio1 exploration well company holds 67 percent interest block clio1 located chevron undertaking work including 3d seismic survey program started late 2006 better determine potential gas find subsequent development options early 2007 company also named operator awarded 50 percent interest exploration acreage greater gorgon area threeyear work program includes geotechnical studies seismic surveys drilling exploration well azerbaijan first tanker lifting crude oil transported 9 percentowned bakutbilisiceyhan btc pipeline occurred june 2006 crude supplied azerbaijan international oil company 10 percent nonoperated working interest brazil june 2006 company announced decision develop 52 percentowned operated offshore frade field initial production targeted early 2009 maximum annual rate estimated 90000 oilequivalent barrels per day 2011 canada company acquired heavy oil leases athabasca region northern alberta canada 2005 2006 leases comprise 75000 acres contain significant volumes potential recovery using steam assisted gravity drainage technology also alberta company announced decision october 2006 participate expansion athabasca oil sands project aosp expansion expected add 100000 barrels per day mining upgrading capacity estimated total project cost 10 billion completion expansion planned 2010 increasing total capacity project approximately 255000 barrels per day company holds 20 percent nonoperated working interest aosp nigeria may 2006 company announced discovery crude oil nonoperated uge1 exploration well 20 percentowned offshore oil prospecting license 214 future drilling contingent primarily outcome ongoing technical studies fs5 norway april 2006 company awarded rights six blocks 19th norwegian licensing round 40 percentowned blocks located nordkapp east basin norwegian barents sea 3d seismic survey acquired planned processed 2007 thailand early 2006 company signed two petroleum exploration concessions gulf thailand chevron 71 percent operated interest one concession proximity company’s tantawan plamuk fields initial drilling concession scheduled 2007 drilling projected 2009 concession chevron 16 percent nonoperated working interest united kingdom june 2006 company produced first crude oil 85 percentowned operated area c captain field project reached maximum production 14000 barrels crude oil per day september 2006 early 2007 company awarded eight operated exploration blocks two nonoperated blocks west shetland islands 24th united kingdom offshore licensing round vietnam april 2006 company signed 30year productionsharing contract vietnam oil gas corporation block 122 offshore eastern vietnam company 50 percent interest block undertaken threeyear work program seismic acquisition drilling exploratory well downstream united states december 2006 company completed expansion fluid catalytic cracking unit company’s refinery pascagoula mississippi increasing refinery’s gasoline manufacturing capacity 10 percent company also submitted environmental permit application construction facilities increase gasoline output another 15 percent india april 2006 company acquired 5 percent interest reliance petroleum limited company formed reliance industries limited construct operate refinery jamnagar india new refinery would world’s sixth largest designed crude oil processing capacity 580000 barrels per day chevron reliance industries also signed two memoranda understanding jointly pursue downstream upstream business opportunities discussions pursuant memoranda understanding lead definitive agreements chevron may increase equity stake reliance petroleum 29 percent biofuels may 2006 company announced completed acquisition 22 percent interest galveston bay biodiesel lp building one first largescale biodiesel plants united states following month company entered research alliance georgia institute technology pursue advanced technology aimed making cellulosic biofuels hydrogen transportation fuels september company announced research collaboration university california davis aimed converting cellulosic biomass transportation fuels common stock dividends stock repurchase program april 2006 company increased quarterly common stock dividend 155 percent 052 per share november company completed second 5 billion common stock buyback program since 2004 december authorized acquisition 5 billion additional shares period three years results operations major operating areas following section presents results operations company’s business segments upstream downstream chemicals well “all other” includes mining power generation businesses various companies departments managed corporate level income also presented us international geographic areas upstream downstream business segments refer note 8 beginning page fs38 discussion company’s “reportable segments” defined fasb 131 disclosures segments enterprise related information section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream exploration production us upstream income 43 billion 2006 increased approximately 100 million 2005 earnings 2006 benefited 850 million higher average prices oilequivalent production effect seven additional months production unocal properties acquired august 2005 substantially offsetting benefits increases operating expense expenses depreciation exploration included operating expense increases costs associated carryover effects hurricanes gulf mexico 2005 income 42 billion 2005 230 million higher 2004 amount included gains approxi fs6 mately 400 million asset sales higher prices crude oil natural gas 2005 five months earnings former unocal operations contributed approximately 2 billion increase periods approximately 90 percent amount related effects higher prices heritagechevron production benefits substantially offset adverse effects lower production higher operating expenses higher depreciation expense associated heritage chevron properties company’s average realization crude oil natural gas liquids 2006 5666 per barrel compared 4697 2005 3412 2004 average natural gas realization 629 per thousand cubic feet 2006 compared 743 551 2005 2004 respectively net oilequivalent production 2006 averaged 763000 barrels per day 5 percent 2005 7 percent 2004 increase 2005 2006 due fullyear benefit production former unocal properties decrease 2004 associated mainly effects hurricanes property sales normal field declines partially offset additional volumes former unocal properties net liquids component oilequivalent production 2006 averaged 462000 barrels per day increase approximately 2 percent 2005 decrease 9 percent 2004 net natural gas production averaged 18 billion cubic feet per day 2006 11 percent 2005 3 percent 2004 refer “selected operating data” table page fs11 threeyear comparative production volumes united states international upstream exploration production international upstream income approximately 89 billion 2006 increased 13 billion 2005 earnings 2006 benefited approximately 30 billion higher prices crude oil natural gas additional seven months production former unocal properties 70 percent benefit associated impact higher prices substantially offsetting benefits increases depreciation expense operating expense exploration expense also adversely affecting 2006 income higher taxes related increase tax rates uk venezuela settlement tax claims tax items venezuela angola chad foreign currency effects reduced earnings 371 million 2006 increased income 14 million 2005 income 2005 approximately 75 billion compared 58 billion 2004 included gains approximately 850 million property sales higher prices crude oil natural gas 2005 five months earnings former unocal operations increased income approximately 29 billion periods 80 percent benefit arose effects higher prices heritagechevron production partially offsetting benefits higher expenses periods certain income tax items including absence 200 million benefit 2004 relating changes income tax laws foreign currency effects increased income 14 million 2005 reduced income 129 million 2004 company’s average realization crude oil natural gas liquids 2006 5765 per barrel compared 4759 2005 3417 2004 average natural gas realization 373 per thousand cubic feet 2006 compared 319 268 2005 2004 respectively net oilequivalent production 19 million barrels per day 2006 including 100000 net barrels per day oil sands canada production operating service agreement venezuela prior conversion joint stock company increased 6 percent 2005 13 percent 2004 trend largely result effects unocal acquisition august 2005 partially offset effect normal field declines property sales 2004 net liquids component oilequivalent production 14 million barrels per day 2006 increase approximately 2 percent 2005 2004 net natural gas production 31 billion cubic feet per day 2006 21 percent 51 percent 2005 2004 respectively refer “selected operating data” table page fs11 threeyear comparative international production volumes fs7 us downstream refining marketing transportation us downstream earnings 19 billion 2006 increased 1 billion 2005 approximately 700 million 2004 average refinedproduct margins 2006 higher 2005 turn also higher 2004 refinery crude inputs higher 2006 comparative periods also benefited earnings however earnings declined 2005 year earlier due mainly increased downtime company’s refineries including shutdown operations pascagoula mississippi month due hurricanes gulf mexico company’s marketing pipeline operations along gulf coast also disrupted extended period due hurricanes fuel costs also higher 2005 2004 sales volumes refined products 2006 approximately 15 million barrels per day increase 1 percent 2005 relatively unchanged 2004 reported sales volume 2006 different basis 2005 2004 due change accounting rules became effective april 1 2006 certain purchase sale buysell contracts counterparty excluding impact accounting change refined product sales 2006 increased approximately 6 percent 3 percent 2005 2004 respectively branded gasoline sales volumes approximately 614000 barrels per day 2006 increased 4 percent 2005 largely due growth texaco brand 2005 refinedproduct sales volumes decreased 2 percent 2004 primarily due disruption related hurricanes refer “selected operating data” table page fs11 threeyear comparative refinedproduct sales volumes united states refer also note 14 accounting buysell contracts page fs43 discussion accounting purchase sale contracts counterparty international downstream refining marketing transportation international downstream income 2 billion 2006 increased 250 million 2005 50 million 2004 increase 2006 2005 associated mainly benefit higherrefined product margins asiapacific canada improved results crudeoil refinedproduct trading activities decrease earnings 2005 2004 due mainly lower sales volumes higher costs fuel transportation expenses associated fire 40 percentowned nonoperated terminal united kingdom tax adjustments various countries items offset improvement average refinedproduct margins periods foreign currency effects improved income 98 million 7 million 2006 2004 respectively reduced income 24 million 2005 fs8 refinedproduct sales volumes 21 million barrels per day 2006 6 percent lower 2005 excluding accounting change buysell contracts sales 1 percent 2005 2006 refinedproduct sales volume 23 million barrels per day 2005 4 percent lower 2004 primarily result lower gasoline trading activity lower fuel oil sales refer “selected operating data” table page fs11 threeyear comparative refinedproduct sales volumes international areas chemicals segment includes company’s oronite subsidiary 50 percentowned chevron phillips chemical company llc cpchem 2006 earnings 539 million increased 200 million 2005 2004 margins 2006 commodity chemicals cpchem fuel lubricant additives oronite higher 2005 2004 earnings decline 2004 2005 mainly attributable plant outages expenses gulf mexico region due hurricanes affected oronite cpchem consists company’s interest dynegy inc mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 516 million 2006 decreased 173 million 689 million 2005 excluding effects foreign currency net charges declined 60 million periods interest income higher 2006 interest expense lower 2004 2005 net charges increased 669 million excluding effects foreign exchange net charges increased 574 million approximately 400 million increase related larger benefits 2004 corporatelevel tax adjustments higher charges 2005 also associated environmental remediation properties sold idled unocal corporatelevel activities interest expense higher 2005 due increase interest rates debt assumed unocal acquisition consolidated statement income comparative amounts certain income statement categories shown sales operating revenues 2006 increased 2005 due primarily higher prices refined products increase 2005 2004 result factor plus effect higher average prices crude oil natural gas higher revenues 2006 net impact change accounting buysell contracts described note 14 page fs43 increased income equity affiliates 2006 mainly due improved results tengizchevroil tco cpchem improvement 2005 2004 primarily due improved results tco hamaca venezuela refer note 12 beginning page fs41 discussion chevron’s investment affiliated companies income nearly 19 billion 2004 included approximately 13 billion gains upstream property sales interest income contributed 600 million 400 million 200 million 2006 2005 2004 respectively average interest rates balances cash marketable securities increased year foreign currency losses 260 million 2006 60 million 2005 2004 crude oil product purchases 2006 increased 2005 higher prices crude oil refined products inclusion unocalrelated amounts full year 2006 increase mitigated effect accounting change april 2006 buysell contracts purchase costs increased 35 percent 2005 prior year result higher prices crude oil natural gas refined products well inclusion unocalrelated amounts five months fs9 operating selling general administrative expenses 2006 increased 16 percent year earlier expenses associated former unocal operations included full year 2006 vs five months 2005 besides effect expenses higher 2006 labor transportation uninsured costs associated hurricanes 2005 number corporate items individually significant total expenses increased 2005 2004 due mainly inclusion formerunocal expenses five months higher costs labor transportation uninsured costs associated storms gulf mexico asset writeoffs exploration expenses 2006 increased 2005 mainly due higher amounts well writeoffs geological geophysical costs operations outside united states well inclusion expenses former unocal operations full year 2006 expenses increased 2005 2004 due mainly inclusion unocalrelated amounts five months depreciation depletion amortization expenses increased 2004 2006 mainly result depreciation depletion expense former unocal assets higher depreciation rates certain heritagechevron crude oil natural gas producing fields worldwide interest debt expense 2006 decreased 2005 primarily due lower average debt balances increase amount interest capitalized partially offset higher average interest rates commercial paper variablerate debt increase 2005 2004 mainly due inclusion debt assumed unocal acquisition higher average interest rates commercial paper borrowings taxes income essentially unchanged 2006 2005 effect higher us refined product sales offset lower sales volumes subject duties company’s european downstream operations increase 2005 2004 result higher international taxes assessed product values higher duty rates areas company’s european downstream operations higher us federal excise taxes jet fuel resulting change tax law became effective 2005 effective income tax rates 46 percent 2006 44 percent 2005 37 percent 2004 higher tax rate 2006 included effect onetime charges totaling 400 million including increase tax rates upstream operations uk north sea settlement tax claim venezuela rates higher 2005 compared prior year due increase earnings countries higher tax rates absence benefits 2004 changes income tax laws certain international operations refer also discussion income taxes note 16 beginning page fs44 fs10 selected operating data12 information related investment dynegy inc yearend 2006 chevron owned 19 percent equity interest common stock dynegy inc provider electricity markets customers throughout united states investment dynegy common stock december 31 2006 carrying value company’s investment dynegy common stock approximately 250 million amount 180 million company’s proportionate interest dynegy’s underlying net assets difference primarily result writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors associated decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly appropriate recognize portion difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2006 approximately 700 million investments dynegy preferred stock may 2006 company’s investment dynegy series c preferred stock redeemed face value 400 million upon redemption preferred stock company recorded beforetax gain 130 million 87 million tax dynegy proposed business combination ls power group dynegy ls power group privately held power plant investor developer manager announced september 2006 companies executed definitive agreement combine dynegy’s assets operations ls power group’s powergeneration portfolio dynegy acquire 50 percent ownership interest development joint venture ls power upon close transaction chevron receive number shares new company’s class common stock currently holds dynegy chevron’s ownership interest combined company approximately 11 percent transaction subject specified conditions including affirmative vote twothirds dynegy’s common shareholders receipt regulatory approvals fs11 liquidity capital resources cash equivalents marketable securities total balances 114 billion 111 billion december 31 2006 2005 respectively cash provided operating activities 2006 243 billion compared 201 billion 2005 147 billion 2004 2006 increase cash provided operating activities mainly reflected higher earnings upstream downstream segments including full year earnings former unocal operations acquired august 2005 cash provided operating activities net contributions employee pension plans 04 billion 10 billion 16 billion 2006 2005 2004 respectively cash provided investing activities included proceeds asset sales 10 billion 2006 27 billion 2005 37 billion 2004 cash provided operating activities asset sales 2006 sufficient fund company’s 138 billion capital exploratory program pay 44 billion dividends stockholders repay approximately 29 billion debt repurchase 5 billion common stock dividends company paid dividends approximately 44 billion 2006 38 billion 2005 32 billion 2004 april 2006 company increased quarterly common stock dividend 155 percent 52 cents per share debt capital lease minority interest obligations total debt capital lease balances 98 billion december 31 2006 129 billion yearend 2005 company also minority interest obligations 209 million 200 million december 31 2005 31 billion reduction total debt capital lease obligations 2006 included early redemption maturity several individual debt issues first quarter 185 million union oil company bonds matured second quarter company redeemed approximately 17 billion unocal debt prior maturity fourth quarter 129 million texaco capital inc bond matured union oil company bonds 196 million redeemed prior maturity commercial paper balances end 2006 reduced 626 million yearend 2005 february 2007 144 million texaco capital inc bond matured company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 66 billion december 31 2006 56 billion yearend 2005 amounts 45 billion 49 billion reclassified longterm end period respectively yearend 2006 settlement reclassified amount expected require use working capital 2007 company intent ability evidenced committed credit facilities refinance amounts longterm basis company’s practice maintain commercial paper levels believes appropriate economic yearend 2006 company 5 billion committed credit facilities various major banks permitted refinancing shortterm obligations longterm basis facilities support commercial paper borrowings used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2006 addition company three existing effective “shelf” registration statements file securities exchange commission together would permit additional registered debt offerings aggregate 38 billion debt securities 2004 chevron entered 1 billion interest rate swap transactions company receives fixed interest rate pays floating rate based notional principal amounts terms swap agreements 250 million 750 million terminate september 2007 february 2008 respectively net cash settlement based difference fixed interest rates floating interest rates fs12 company outstanding public bonds issued chevron corporation profit sharingsavings plan trust fund chevron canada funding company formerly chevron texaco capital company texaco capital inc union oil company california securities guaranteed chevron corporation rated aa standard poor’s corporation aa2 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s company’s canadian commercial paper rated r1 middle dominion bond rating service ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions company believes substantial borrowing capacity meet unanticipated cash requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program 5 billion stock repurchase program initiated december 2005 completed november 2006 785 million common shares repurchased program total cost 49 billion december 2006 company authorized acquisition additional 5 billion common shares time prevailing prices permitted securities laws legal requirements subject market conditions factors program period three years may discontinued time program company acquired approximately 13 million shares open market 100 million december 2006 midfebruary 2007 increased total shares acquired 82 million cost 592 million capital exploratory expenditures total reported expenditures 2006 166 billion including 19 billion company’s share affiliates’ expenditures require cash outlays company 2005 2004 expenditures 111 billion 83 billion respectively including company’s share affiliates’ expenditures 17 billion 16 billion cor responding periods 2005 amount excludes 173 billion acquisition unocal corporation 166 billion expenditures 2006 threefourths 128 billion related upstream activities approximately percentage also expended upstream operations 2005 2004 international upstream accounted 70 percent worldwide upstream investment three years reflecting company’s continuing focus opportunities available outside united states 2007 company estimates capital exploratory expenditures 18 percent higher 196 billion including 24 billion spending affiliates threefourths total 146 billion budgeted exploration production activities 106 billion amount outside united states spending 2007 primarily targeted exploratory prospects deepwater gulf mexico western africa major development projects angola australia brazil kazakhstan nigeria deepwater gulf mexico oil sands project canada worldwide downstream spending 2007 estimated 38 billion 16 billion projects united states capital projects include upgrades refineries united states south korea construction liquefied natural gas tankers gastoliquids facilities support associated upstream projects investments chemicals technology corporate businesses 2007 budgeted 12 billion technology investments include projects related molecular transformation unconventional hydrocarbons oil gas reservoir management development secondgeneration biofuel production capital exploratory expenditures fs13 pension obligations 2006 company’s pension plan contributions totaled approximately 450 million approximately 225 million total contributed us plans 2007 company estimates total contributions 500 million actual amounts dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs20 financial ratios financial ratios current ratio current assets divided current liabilities current ratio periods adversely affected fact chevron’s inventories valued lastinfirstout basis yearend 2006 book value inventory lower replacement costs based average acquisition costs year approximately 6 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs interest coverage ratio higher 2006 compared 2005 primarily due higher beforetax income lower average debt balances company’s interest coverage ratio essentially unchanged 2005 2004 debt ratio total debt percentage total debt plus equity decrease 2005 2006 due lower average debt levels increase stockholders’ equity although total debt slightly higher end 2005 year earlier due assumption debt associated unocal acquisition debt ratio declined result higher stockholders’ equity balances retained earnings capital stock issued connection unocal acquisition guarantees offbalancesheet arrangements contractual obligations contingencies direct indirect guarantees amounts exclude indemnifications contingencies associated sale company’s interest equilon motiva 2002 discussed “indemnifications” section page fs15 december 31 2006 company subsidiaries provided guarantees either directly indirectly 296 million notes contractual obligations affiliated companies 131 million third parties described major category amounts carried liabilities company’s obligations guarantees 296 million guarantees provided affiliates related borrowings capital projects guarantees undertaken achieve lower interest rates generally cover construction periods capital projects included amounts company’s guarantees 214 million associated construction completion guarantee debt financing company’s equity interest btc crude oil pipeline project substantially 296 million guaranteed expire 2007 2011 remaining expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed 131 million guarantees provided behalf third parties relate construction loans governments certain company’s international upstream operations substantially 131 million guarantees expire 2011 remainder expiring 2015 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed december 31 2006 chevron also outstanding guarantees 120 million equilon debt leases following february 2002 disposition interest equilon company received indemnification shell claims arising guarantees company fs14 recorded liability guarantees approximately 50 percent amounts guaranteed expire within 2007 2011 period guarantees remaining amounts expiring 2019 indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2006 company paid approximately 48 million indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon indemnities must asserted either early february 2007 later february 2009 claims relating motiva indemnities must asserted either early february 2007 later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 indemnification agreement company’s liability unlimited april 2022 liability expires acquirer shares certain environmental remediation costs maximum obligation 200 million reached december 31 2006 securitization company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2006 approximately 12 billion representing 7 percent chevron’s total current accounts notes receivable balance securitized chevron’s total estimated financial exposure securitizations december 31 2006 approximately 80 million arrangements effect accelerating chevron’s collection securitized amounts event spes experience major defaults collection receivables chevron believes would loss exposure connected thirdparty investments securitizations longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2007 32 billion 2008 17 billion 2009 21 billion 2010 19 billion 2011 09 billion 2012 41 billion portion commitments may ultimately shared project partners total payments agreements approximately 30 billion 2006 21 billion 2005 16 billion 2004 minority interests company commitments 209 million related minority interests subsidiary companies following table summarizes company’s significant contractual obligations contractual obligations financial derivative instruments commodity derivative instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activity material company’s financial position net income cash flows 2006 company’s market exposure positions monitored managed daily basis internal risk fs15 control group ensure compliance company’s risk management policies approved audit committee company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures options swap contracts traded nymex new york mercantile exchange electronic platforms ice intercontinental exchange globex chicago mercantile exchange addition crude oil natural gas refined product swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes hypothetical 10 percent increase price natural gas crude oil refined products would increase fair value natural gas purchase derivative contracts approximately 10 million increase fair value crude oil purchase derivative contracts 4 million reduce fair value refined product sale derivative contracts 30 million respectively hypothetical decrease prices commodities would result approximately opposite effects fair values contracts hypothetical effect contracts estimated calculating fair value contracts difference hypothetical current market prices multiplied contract amounts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect hypothetical 10 percent increase value us dollar yearend 2006 would reduction fair value foreign exchange contracts approximately 40 million effect would opposite hypothetical 10 percent decrease yearend value us dollar interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2006 weighted average maturity “receive fixed” interest rate swaps approximately one year “receive floating” swaps outstanding year end hypothetical increase 10 basis points fixed interest rates would reduce fair value “receive fixed” swaps approximately 2 million financial derivative instruments discussed material change market risk 2006 2005 hypothetical variances used section selected illustrative purposes represent company’s estimation market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2006 annual report form 10k transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements place company’s refining affiliate thailand refer page fs15 discussion management believes foregoing agreements others negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party approximately 75 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater resolution actions may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period company currently use mtbe manufacture gasoline united states rfg patent fourteen purported class actions brought consumers reformulated gasoline rfg fs16 alleging unocal misled california air resources board adopting standards composition rfg overlapped unocal’s undisclosed pending patents eleven lawsuits consolidated us district court central district california three consolidated california state court unocal alleged monopolized conspired engaged unfair methods competition resulting injury consumers rfg plaintiffs consolidated actions seek unspecified actual punitive damages attorneys’ fees interest behalf alleged class consumers purchased “summertime” rfg california january 1995 august 2005 unocal believes valid defenses intends vigorously defend lawsuits company’s potential exposure related lawsuits cannot currently estimated environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws chevron’s environmental reserve december 31 2006 1441 million included balance remediation activities 242 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2006 122 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remaining yearend 2006 environmental reserves balance 1319 million 834 million related approximately 2250 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 485 million associated various sites international downstream 117 million upstream 252 million chemicals 61 million 55 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2006 recorded liability material company’s financial position results operations liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties effective january 1 2003 company implemented fasb statement 143 accounting asset retirement obligations fas 143 fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement fs17 longlived assets liability reasonably estimated liability balance approximately 58 billion asset retirement obligations yearend 2006 related primarily upstream mining properties refer note 24 page fs58 discussion company’s asset retirement obligations company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 24 page fs58 related fas 143 company’s adoption 2005 fasb interpretation fin 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 discussion “environmental matters” page fs19 income taxes company calculates income tax expense liabilities quarterly liabilities generally finalized individual taxing authorities several years end annual period income taxes calculated us federal income tax liabilities settled 1996 chevron corporation 1997 unocal corporation unocal 2001 texaco corporation texaco california franchise tax liabilities settled 1991 chevron 1998 unocal 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination global operations chevron affiliates conduct business activities approximately 180 countries besides united states company affiliates significant operations following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark france india indonesia kazakhstan myanmar netherlands nigeria norway partitioned neutral zone kuwait saudi arabia philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom venezuela vietnam company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken governments increase public ownership company’s partially wholly owned businesses assets impose additional taxes royalties company’s operations certain locations governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest acts violence strained relations government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions december 31 2006 company approximately 12 billion suspended exploratory wells included properties plant equipment increase 130 million 2005 increase 568 million 2004 300 million suspended wells added time unocal acquisition august 2005 future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 12 billion suspended wells yearend 2006 uncertain pending future activities including normal project evaluation additional drilling refer note 20 beginning page fs47 additional discussion suspended wells equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 million possible maximum net amount could owed chevron fs18 estimated 150 million timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2006 approximately 22 billion consolidated companies included expenditures approximately 870 million environmental capital expenditures 13 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2007 total worldwide environmental capital expenditures estimated 12 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply exist ing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation crude oil natural gas reserves sec rules require “ geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” beginning page fs68 changes estimates three years ending december 31 2006 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs76 estimates provedreserve values three years ending december 31 2004 2006 based yearend prices time note 1 consolidated financial statements beginning page fs32 includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil fs19 natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment properties plant equipment investments affiliates” page fs21 includes reference conditions downward revisions provedreserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs32 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement employee benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 21 beginning page fs48 includes information funded status company’s pension opeb plans end 2006 2005 components pension opeb expense three years ending december 31 2006 underlying assumptions periods note also presents incremental impact recording funded status company’s pension opeb plans yearend 2006 provisions fasb statement 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r fas 158 pension opeb expense recorded consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments adoption fas 158 yearend 2006 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet funded status overfunded pension plans recorded longterm asset “deferred charges assets” funded status underfunded unfunded pension opeb plans recorded “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense recorded “accumulated comprehensive income” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies expected longterm rate return us pension plan assets account 70 percent company’s pension plan assets remained 78 percent since 2002 10 years ending december 31 2006 actual asset returns averaged 97 percent plan yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets measurement date used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2006 company selected 58 percent discount rate major us pension postretirement plans rate selected based moody’s aa corporate bond index cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2006 discount rates end 2005 2004 55 percent 58 percent respectively increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2006 approximately 585 million indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2006 approximately 60 million 1 percent increase discount rate plan accounted 60 percent companywide pension obligation would reduced total pension plan expense 2006 approximately 160 million fs20 increase discount rate would decrease pension obligation thus changing funded status plan recorded consolidated balance sheet total pension liability consolidated balance sheet december 31 2006 underfunded plans approximately 17 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 275 million would changed plan’s funded status underfunded overfunded resulting pension asset 250 million plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2006 company’s pension plan contributions approximately 450 million approximately 225 million us plans 2007 company estimates contributions approximately 500 million actual contribution amounts dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2006 230 million total liability reflected underfunded status plans end 2006 33 billion indication discount rate sensitivity determination opeb expense 2006 1 percent increase discount rate company’s primary us opeb plan accounted 75 percent companywide opeb expense would decreased opeb expense approximately 25 million 025 percent increase discount rate plan accounted 90 percent companywide opeb liabilities would decreased total opeb liabilities end 2006 approximately 70 million main us postretirement medical plan annual increase company contributions limited 4 percent per year cap becomes effective year retirement premedicareeligible employees retiring january 1 2005 cap effective january 1 2005 premedicareeligible employees retiring date medicareeligible retirees active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 9 percent 2007 gradually drop 5 percent 2011 beyond indication health care costtrend rate sensitivity determination opeb expense 2006 1 percent increase rates main us postretirement medical plan accounted 90 percent companywide opeb obligations would increased opeb expense 8 million differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 21 beginning page fs48 information 26 billion actuarial losses recorded company december 31 2006 description method used amortize costs estimate costs recognized expense 2007 impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated provedreserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supply demand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions major impairments ppe recorded three years ending december 31 2006 estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period fs21 amount impairment subject sensitivity analysis time company performs impairment reviews determines writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values business combinations purchaseprice allocation accounting business combinations requires allocation company’s purchase price various assets liabilities acquired business respective fair values company uses available information make fair value determinations major acquisitions may hire independent appraisal firm assist making fairvalue estimates instances assumptions respect timing amount future revenues expenses associated asset might used determining fair value actual timing amount net cash flows revenues expenses related asset time may differ materially initial estimates timing delayed significantly net cash flows decline significantly asset could become impaired goodwill acquired business combination subject amortization required fasb statement 142 goodwill intangible assets company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount goodwill arising unocal acquisition described detail note 2 beginning page fs34 contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income refer business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2006 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards eitf issue 046 accounting stripping costs incurred production mining industry issue 046 march 2005 fasb ratified earlier emerging issues task force eitf consensus issue 046 adopted company january 1 2006 stripping costs removing overburden waste materials access mineral deposits consensus calls stripping costs incurred mine goes production treated variable production costs considered component mineral inventory cost subject accounting research bulletin arb 43 restatement revision accounting research bulletins adoption accounting company’s coal oil sands mining operations resulted 19 million reduction retained earnings january 1 2006 fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 july 2006 fasb issued fin 48 became effective company january 1 2007 interpretation clarifies accounting income tax benefits uncertain nature fin 48 company recognize tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie greater 50 percent likelihood upheld audit based technical merits tax position accounting interpretation also provides guidance measurement methodology derecognition thresholds financial statement classification disclosures interest penalties recogni fs22 tion accounting cumulativeeffect adjustment new interpretation intended provide better financial statement comparability among companies required annual disclosures include tabular reconciliation unrecognized tax benefits beginning end period amount unrecognized tax benefits recognized would affect effective tax rate amounts interest penalties recognized financial statements expected significant impacts unrecognized tax benefits financial statements subsequent 12month reporting period description tax years remaining examined major tax jurisdictions result implementation fin 48 company expects recognize increase liability unrecognized tax benefits associated interest penalties january 1 2007 connection increase liability company estimates retained earnings beginning 2007 reduced 250 million less amount liability impact retained earnings depend part clarification expected issued fasb related criteria determining date ultimate settlement tax authority fasb statement 157 fair value measurements fas 157 september 2006 fasb issued fas 157 become effective company january 1 2008 standard defines fair value establishes framework measuring fair value expands disclosures fair value measurements fas 157 require new fair value measurements would apply assets liabilities required recorded fair value accounting standards impact company adoption fas 157 2008 depend company’s assets liabilities time required measured fair value fasb statement 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r fas 158 september 2006 fasb issued fas 158 adopted company december 31 2006 refer note 21 beginning page fs48 additional information fs23 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx february 23 2007 stockholders record numbered approximately 223000 restrictions company’s ability pay dividends fs24 management’s responsibility financial statements stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2006 company management’s assessment effectiveness internal control financial reporting december 31 2006 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein david j o’reilly stephen j crowe mark humphrey chairman board vice president vice president chief executive officer chief financial officer comptroller february 28 2007 fs25 report independent registered public accounting firm stockholders board directors chevron corporation completed integrated audits chevron corporation’s consolidated financial statements internal control financial reporting december 31 2006 accordance standards public company accounting oversight board united states opinions based audits presented consolidated financial statements financial statement schedule opinion consolidated financial statements listed index appearing item 15a1 annual report form 10k present fairly material respects financial position chevron corporation subsidiaries december 31 2006 2005 results operations cash flows three years period ended december 31 2006 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements financial statements financial statement schedule responsibility company’s management responsibility express opinion financial statements financial statement schedule based audits conducted audits statements accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether financial statements free material misstatement audit financial statements includes examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation believe audits provide reasonable basis opinion discussed note 14 consolidated financial statements company changed method accounting buysell contracts april 1 2006 discussed note 21 consolidated financial statements company changed method accounting defined benefit pension postretirement plans december 31 2006 internal control financial reporting also opinion management’s assessment included accompanying management’s report internal control financial reporting company maintained effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso fairly stated material respects based criteria furthermore opinion company maintained material respects effective internal control financial reporting december 31 2006 based criteria established internal control integrated framework issued coso company’s management responsible maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting responsibility express opinions management’s assessment effectiveness company’s internal control financial reporting based audit conducted audit internal control financial reporting accordance standards public company accounting oversight board united states standards require plan perform audit obtain reasonable assurance whether effective internal control financial reporting maintained material respects audit internal control financial reporting includes obtaining understanding internal control financial reporting evaluating management’s assessment testing evaluating design operating effectiveness internal control performing procedures consider necessary circumstances believe audit provides reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp san francisco california february 28 2007 fs26 consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs27 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs28 consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs29 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs30 consolidated statement stockholders’ equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs31 note 1 summary significant accounting policies general exploration production upstream operations consist exploring developing producing crude oil natural gas also marketing natural gas refining marketing transportation downstream operations relate refining crude oil finished petroleum products marketing crude oil many products derived petroleum transporting crude oil natural gas petroleum products pipeline marine vessel motor equipment rail car chemical operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lubricant oil additives company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income deferred income taxes provided gains losses investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value subsequent recoveries carrying value investments reported “other comprehensive income” differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference company’s share affiliate’s reported earnings adjusted quarterly appropriate reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity commodity derivative instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost fs32 properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 20 beginning page fs47 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate refining marketing transportation chemical areas impairment reviews generally done basis refinery plant marketing area marketing assets country impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value required financial accounting standards board fasb statement 143 accounting asset retirement obligations fas 143 fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 24 page fs58 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses mining assets determined using unitofproduction method proven reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill acquired business combination subject amortization required fasb statement 142 goodwill intangible assets company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount goodwill arising unocal acquisition described detail note 2 beginning page fs34 environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas mineral producing properties liability asset retire fs33 ment obligation made following fas 143 refer note 24 page fs58 discussion fas 143 federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized basis company’s net working interest entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs27 refer note 14 page fs43 discussion accounting buysell arrangements stock options sharebased compensation effective july 1 2005 company adopted provisions fasb statement 123r sharebased payment fas 123r sharebased compensation plans company previously accounted plans recognition measurement principles accounting principles board apb opinion 25 accounting stock issued employees apb 25 related interpretations disclosure requirements established fasb statement 123 accounting stockbased compensation fas 123 refer note 22 beginning page fs53 description company’s sharebased compensation plans information related awards granted plans additional information company’s adoption fas 123r following table illustrates effect net income earnings per share company applied fairvalue recognition provisions fas 123 stock options stock appreciation rights performance units restricted stock units periods prior adoption fas 123r actual effect 2005 net income earnings per share periods adoption fas 123r note 2 acquisition unocal corporation august 2005 company acquired unocal corporation unocal independent oil gas exploration production company unocal’s principal upstream operations north america asia including caspian region also located asia unocal’s geothermal energy electrical power businesses activities included ownership interests proprietary common carrier pipelines natural gas storage facilities mining operations aggregate purchase price unocal approximately 17288 thirdparty appraisal firm engaged assist company process determining fair values unocal’s tangible intangible assets final purchaseprice allocation assets liabilities acquired completed june 30 2006 fs34 acquisition accounted rules fasb statement 141 business combinations following table summarizes final purchaseprice allocation 4820 goodwill represents benefits acquisition additional fair values net assets acquired assigned upstream segment goodwill deductible tax purposes goodwill balance reviewed possible impairment june 30 2006 according requirements fasb statement 142 goodwill intangible assets test goodwill impairment annual basis goodwill determined impaired time events occurred subsequently would necessitate additional impairment review following unaudited pro forma summary presents results operations acquisition unocal occurred beginning period pro forma summary uses estimates assumptions based information available time management believes estimates assumptions reasonable however actual results may differ significantly pro forma financial information pro forma information reflect synergistic savings might achieved combining operations intended reflect actual results would occurred companies actually combined periods presented note 3 information relating consolidated statement cash flows consolidated statement cash flows excludes effects noncash transactions october 2006 operating service agreements venezuela converted joint stock companies upon conversion company reclassified 441 longterm receivables 132 accounts receivable 45 properties plant equipment investments equity affiliates refer also note 21 page fs48 noncash effects associated implementation fasb statement 158 employers’ accounting defined pension postretirement plans accordance cashflow classification requirements fas 123r sharebased payment “net decrease increase operating working capital” includes reductions 94 20 excess income tax benefits associated stock options exercised 2006 2005 respectively amounts offset “net purchases treasury shares” “net purchases treasury shares” represents cost common shares acquired open market less cost shares issued sharebased compensation plans openmarket purchases totaled 5033 3029 2122 2006 2005 2004 respectively fs35 may 2006 company’s investment dynegy series c preferred stock redeemed face value 400 upon redemption preferred stock company recorded beforetax gain 130 87 tax 130 gain included consolidated statement income “income equity affiliates” 2005 “cash portion unocal acquisition net unocal cash received” represents purchase price net 1600 cash received aggregate purchase price unocal approximately 17288 refer note 2 starting page fs34 additional discussion unocal acquisition major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented management’s discussion analysis beginning page fs2 presented following table net noncash additions 440 2006 435 2005 212 2004 note 4 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum natural gas liquids excluding regulated pipeline operations chevron cusa also holds chevron’s investments chevron phillips chemical company llc cpchem joint venture dynegy inc dynegy accounted using equity method note 5 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented following table restrictions ctc’s ability pay dividends make loans advances december 31 2006 note 6 stockholders’ equity retained earnings december 31 2006 2005 included approximately 5580 5000 respectively company’s share undistributed earnings equity affiliates december 31 2006 134 million shares chevron’s common stock remained available issuance fs36 160 million shares reserved issuance chevron corporation longterm incentive plan ltip amended restated approved stockholders 2004 addition approximately 503000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan nonemployee directors’ plan approved stockholders 2003 refer note 25 page fs58 discussion company’s common stock split 2004 note 7 financial derivative instruments commodity derivative instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes company uses international swaps dealers association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net markedtomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps related portion company’s floatingrate debt recorded fair value balance sheet resulting gains losses reflected income fair values interest rate swaps reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported directly income part “interest debt expense” fair value fair values derived either quoted market prices available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 5131 7424 estimated fair values 5621 7945 december 31 2006 2005 respectively company holds cash equivalents marketable securities us nonus portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities fair values 9200 8995 december 31 2006 2005 respectively balances 8247 7894 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately 14 years financial derivative instruments discussed material change market risk presented 2005 fair values financial derivative instruments end 2006 2005 material concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array finan fs37 cial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers note 8 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates purpose investments grouped follows upstream exploration production downstream refining marketing transportation chemicals first three groupings represent company’s “reportable segments” “operating segments” defined financial accounting standards board fasb statement 131 disclosures segments enterprise related information fas 131 segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined fas 131 codm company’s executive committee senior officers includes chief executive officer turn reports board directors chevron corporation operating segments represent components company described fas 131 terms engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assess performance c discrete financial information available segment managers reportable segments accountable directly maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members executive committee also individual management responsibilities participate committees purposes acting codm “all other” activities include company’s interest dynegy mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” aftertax segment income continuing operations presented following table fs38 segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2006 2005 follows “all other” assets consist primarily worldwide cash equivalents marketable securities real estate information systems company’s investment dynegy mining operations power generation businesses technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2006 2005 2004 presented following table products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products revenues chemicals segment derived primarily manufacture sale additives lubricants fuel “all other” activities include revenues mining operations coal minerals power generation businesses insurance operations real estate activities technology companies united states single country accounted 10 percent company’s total sales operating revenues 2006 includes buysell contracts 6725 2006 23822 2005 18650 2004 substantially amounts period relates downstream segment refer note 14 page fs43 discussion company’s accounting buysell contracts fs39 segment income taxes segment income tax expenses years 2006 2005 2004 follows income tax expense 100 related discontinued operations 2004 included segment information additional information segmentation major equity affiliates contained note 12 beginning page fs41 information related properties plant equipment segment contained note 13 page fs43 note 9 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2006 2005 2004 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2006 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 10 restructuring reorganization costs connection unocal acquisition company implemented restructuring reorganization program part effort capture synergies combined companies eliminating redundant operations consolidating offices facilities sharing common services functions part restructuring reorganization approximately 600 employees eligible severance payments associated positions united states relate primarily corporate upstream executive administrative functions yearend 2006 program substantially complete fs40 accrual 106 established part purchaseprice allocation unocal 11 balance yearend 2006 classified current liability consolidated balance sheet activity accrual shown table shown table activity company’s liability related various reorganizations restructurings across several businesses corporate departments 17 balance yearend 2006 also classified current liability consolidated balance sheet associated charges credits periods categorized “operating expenses” “selling general administrative expenses” consolidated statement income activity company’s liability related various reorganizations restructurings summarized following table note 11 assets held sale discontinued operations december 31 2004 company classified 162 net properties plant equipment “assets held sale” consolidated balance sheet assets category related group service stations outside united states summarized income statement information relating discontinued operations follows assets sold disposed classified discontinued operations mainly cash flows assets eliminated ongoing operations company subsequent december 31 2006 approximately 300 company’s refining assets netherlands met criteria classifying assets held sale company expects record gain upon close sale subject signing sales agreement obtaining necessary regulatory approvals note 12 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period hamaca chevron 30 percent interest hamaca heavy oil production upgrading project located venezuela’s orinoco belt fs41 petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela chevron previously operated field operating service agreement december 31 2006 company’s carrying value investment petroboscan approximately 300 higher amount underlying equity petroboscan’s net assets gs caltex corporation chevron owns 50 percent gs caltex joint venture gs holdings joint venture originally formed 1967 lg group caltex imports refines markets petroleum products petrochemicals predominantly south korea caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium cpc provides critical export route crude oil tco karachaganak december 31 2006 company’s carrying value investment cpc 50 higher amount underlying equity cpc’s net assets star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery thailand petroleum authority thailand owns remaining 36 percent sprc caltex australia ltd chevron 50 percent equity ownership interest caltex australia limited cal remaining 50 percent cal publicly owned december 31 2006 fair value chevron’s share cal common stock approximately 2400 aggregate carrying value company’s investment cal approximately 60 lower amount underlying equity cal net assets colonial pipeline company chevron owns approximate 23 percent equity interest colonial pipeline company colonial pipeline system runs texas new jersey transports petroleum products 13state market december 31 2006 company’s carrying value investment colonial pipeline approximately 590 higher amount underlying equity colonial pipeline’s net assets chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc cpchem half owned conocophillips corporation december 31 2006 company’s carrying value investment cpchem approximately 80 lower amount underlying equity cpchem’s net assets dynegy inc chevron owns 19 percent equity interest common stock dynegy provider electricity markets customers throughout united states investment dynegy common stock december 31 2006 carrying value company’s investment dynegy common stock approximately 250 amount 180 company’s proportionate interest dynegy’s underlying net assets difference primarily result writedowns investment 2002 declines market value common shares company’s carrying value deemed temporary difference assigned extent practicable specific dynegy assets liabilities based upon company’s analysis various factors contributing decline value dynegy shares company’s equity share dynegy’s reported earnings adjusted quarterly appropriate reflect difference allocated values dynegy’s historical book values market value company’s investment dynegy’s common stock december 31 2006 approximately 700 investment dynegy preferred stock may 2006 company’s investment dynegy series c preferred stock redeemed face value 400 upon redemption preferred stock company recorded beforetax gain 130 87 tax dynegy proposed business combination ls power group dynegy ls power group privately held power plant investor developer manager announced september 2006 companies executed definitive agreement combine dynegy’s assets operations ls power group’s power generation portfolio dynegy acquire 50 percent ownership interest development joint venture ls power upon close transaction chevron receive number shares new company’s class common stock currently holds dynegy chevron’s ownership interest combined company approximately 11 percent transaction subject specified conditions including affirmative vote twothirds dynegy’s common shareholders receipt regulatory approvals information “sales operating revenues” consolidated statement income includes 9582 8824 7933 affiliated companies 2006 2005 2004 respectively “purchased crude oil products” includes 4222 3219 2548 affiliated companies 2006 2005 2004 respectively “accounts notes receivable” consolidated balance sheet includes 1297 1729 due affiliated companies december 31 2006 2005 respectively “accounts payable” includes 262 249 due affiliated companies december 31 2006 2005 respectively fs42 following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 3915 december 31 2006 note 13 properties plant equipment1 note 14 accounting buysell contracts company adopted accounting prescribed eitf issue 0413 accounting purchases sales inventory counterparty issue 0413 prospective basis april 1 2006 issue 0413 requires two legally separate exchange transactions counterparty including buysell transactions combined considered single arrangement purposes applying provisions accounting principles board opinion 29 accounting nonmonetary transactions entered “in contemplation” one another prior periods company accounted buysell transactions consolidated statement income monetary transaction purchases reported “purchased crude oil products” sales reported “sales operating revenues” company’s adoption issue 0413 buysell transactions beginning second quarter 2006 netted consolidated statement income effect net income amounts associated buy sell transactions periods prior second quarter 2006 shown footnote consolidated statement income page fs27 fs43 note 15 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party approximately 75 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater resolution actions may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related lawsuits claims currently determinable could material net income one period company currently use mtbe manufacture gasoline united states rfg patent fourteen purported class actions brought consumers reformulated gasoline rfg alleging unocal misled california air resources board adopting standards composition rfg overlapped unocal’s undisclosed pending patents eleven lawsuits consolidated us district court central district california three consolidated california state court unocal alleged monopolized conspired engaged unfair methods competition resulting injury consumers rfg plaintiffs consolidated actions seek unspecified actual punitive damages attorneys’ fees interest behalf alleged class consumers purchased “summertime” rfg california january 1995 august 2005 unocal believes valid defenses intends vigorously defend lawsuits company’s potential exposure related lawsuits cannot currently estimated note 16 taxes 2006 beforetax income us operations including related corporate charges 9131 compared beforetax income 6733 7776 2005 2004 respectively international operations beforetax income 22845 18464 12775 2006 2005 2004 respectively us federal income tax expense reduced 116 289 176 2006 2005 2004 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate explained table company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following 2006 deferred tax liabilities increased approximately 2500 amount reported 2005 fs44 increase primarily related increased temporary differences properties plant equipment deferred tax assets increased approximately 3800 2006 increase related primarily higher pension benefit obligations resulting implementation fas 158 increased foreign tax credits resulting higher crude oil prices tax jurisdictions high income tax rates increased asset retirement obligations overall valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences benefit expected realized tax loss carryforwards exist many international jurisdictions whereas tax loss carryforwards expiration date others expire various times 2007 2029 foreign tax credit carryforwards 1916 expire 2009 2016 december 31 2006 2005 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 21035 december 31 2006 significant majority amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested american jobs creation act 2004 october 2004 american jobs creation act 2004 passed law act provides deduction income qualified domestic refining upstream production activities phased 2005 2010 company expects net effect provision act result decrease federal effective tax rate 2007 approximately 33 percent based current earnings levels long term company expects new deduction result decrease annual effective tax rate 32 percent category income based current earnings levels taxes income follows note 17 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 7 beginning page fs37 information concerning company’s debtrelated derivative activities december 31 2006 company 4950 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial fs45 paper borrowings interest borrowings terms specific agreements may based london interbank offered rate bank prime rate amounts outstanding credit agreements 2006 yearend december 31 2006 2005 company classified 4450 4850 respectively shortterm debt longterm settlement obligations expected require use working capital 2007 company intent ability refinance debt longterm basis note 18 longterm debt chevron three “shelf” registration statements file sec together would permit issuance 3800 debt securities pursuant rule 415 securities act 1933 total longterm debt excluding capital leases december 31 2006 7405 company’s longterm debt outstanding yearend 2006 2005 follows longterm debt 5131 matures follows 2007 2176 2008 805 2009 428 2010 185 2011 50 2011 1487 first quarter 2006 185 union oil company bonds retired maturity second quarter company redeemed approximately 1700 unocal debt recognized 92 beforetax gain october 2006 129 texaco capital inc bond matured november 2006 company retired union oil company bonds 196 note 19 new accounting standards eitf issue 046 accounting stripping costs incurred production mining industry issue 046 march 2005 fasb ratified earlier emerging issues task force eitf consensus issue 046 adopted company january 1 2006 stripping costs removing overburden waste materials access mineral deposits consensus calls stripping costs incurred mine goes production treated variable production costs considered component mineral inventory cost subject arb 43 restatement revision accounting research bulletins adoption accounting company’s coal oil sands mining operations resulted 19 reduction retained earnings january 1 2006 fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109fin 48 july 2006 fasb issued fin 48 became effective company january 1 2007 interpretation clarifies accounting income tax benefits uncertain nature fin 48 company recognize tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie greater 50 percent likelihood upheld audit based technical merits tax position accounting interpretation also provides guidance measurement methodology derecognition thresholds financial statement classification disclosures interest penalties recognition accounting cumulativeeffect adjustment new interpretation intended provide better financial statement comparability among companies required annual disclosures include tabular reconciliation unrecognized tax benefits beginning end period amount unrecognized tax benefits recognized would affect effective tax rate amounts interest penalties recognized financial statements expected significant impacts unrecognized tax benefits financial statements subsequent 12month reporting period description tax years remaining examined major tax jurisdictions result implementation fin 48 company expects recognize increase liability unrecog fs46 nized tax benefits associated interest penalties january 1 2007 connection increase liability company estimates retained earnings beginning 2007 reduced 250 less amount liability impact retained earnings depend part clarification expected issued fasb related criteria determining date ultimate settlement tax authority fasb statement 157 fair value measurements fas 157 september 2006 fasb issued fas 157 become effective company january 1 2008 standard defines fair value establishes framework measuring fair value expands disclosures fair value measurements statement require new fair value measurements would apply assets liabilities required recorded fair value accounting standards impact company adoption fas 157 2008 depend company’s assets liabilities time required measured fair value fasb statement 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r fas 158 september 2006 fasb issued fas 158 adopted company december 31 2006 refer note 21 beginning page fs48 additional information note 20 accounting suspended exploratory wells company accounts cost exploratory wells accordance fasb statement 19 financial reporting oil gas producing companies fas 19 amended fasb staff position fsp fas 191 accounting suspended well costs provides exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b enterprise making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fas 19 provides number indicators assist entity demonstrate sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2006 capitalized exploratory well costs charged expense upon 2005 adoption fsp fas 191 represent property sales exchanges following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling aging former unocal wells based date drilling completed rather chevron’s acquisition unocal 2005 certain projects multiple wells fields 907 exploratory well costs capitalized period greater one year december 31 2006 447 23 projects related projects drilling activities way firmly planned near future additional 63 one project drilling activity 2006 397 balance related 20 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 397 referenced following activities associated assessing reserves projects’ economic viability 99 million two projects development plans submitted government early 2007 b 80 million one project prefeed frontend engineering design studies ongoing feed expected commence 2007 c 75 million three projects continued pursue unitization opportunities fs47 adjacent discoveries span international boundaries 42 million one project finalize analysis new seismic study determine development facility concept e 101 miscellaneous activities 13 projects smaller amounts suspended progress made projects category decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 907 suspended well costs capitalized period greater one year december 31 2006 represents 110 exploratory wells 44 projects tables contain aging costs well project basis note 21 employee benefit plans company definedbenefit pension plans many employees company typically prefunds definedbenefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent per year contribution cap becomes effective year retirement premedicareeligible employees retiring january 1 2005 cap effective january 1 2005 premedicareeligible retirees retiring date medicareeligible retirees certain life insurance benefits paid company annual contributions based actual plan experience june 2006 company announced changes several us pension postretirement benefit plans primarily merging benefits several unocal plans related chevron plans plan combinations formerunocal employees retiring july 1 2006 received recognition unocal pay service history toward benefits paid chevron pension postretirement benefit plans unocal employees retired july 1 2006 participating unocal postretirement medical plan merged chevron primary us plan effective january 1 2007 addition company’s contributions medicareeligible retirees chevron plan increased 2007 conjunction merger formerunocal participants chevron plan effective december 31 2006 company implemented recognition measurement provisions financial accounting standards board fasb statement 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132rfas 158 requires recognition overfunded underfunded status defined benefit pension postretirement benefit plans asset liability offset “accumulated comprehensive loss” addition chevron recognized share amounts recorded affiliated companies “accumulated comprehensive loss” reflect adoption fas 158 december 31 2006 following table illustrates incremental effect adoption fas 158 individual lines company’s december 2006 “consolidated balance sheet” applying additional minimum liability adjustment required fasb statement 87 employers’ accounting pensions fs48 company uses measurement date december 31 value benefit plan assets obligations funded status company’s pension postretirement benefit plans 2006 2005 follows amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2005 reflected net cumulative employer contributions net periodic benefit costs recognized earnings 2005 amounts noncurrent pension liabilities also included minimum pension liability adjustments offset “accumulated comprehensive loss” “deferred charges assets” amounts recognized december 31 2006 reflected net funded status company’s definedbenefit pension postretirement plans presented either net asset overfunded liability underfunded fs49 amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension postretirement plans excludes affiliates end 2006 adoption fas 158 consisted accumulated benefit obligations us international pension plans 7987 3669 respectively december 31 2006 7931 3080 respectively december 31 2005 information us international pension plans accumulated benefit obligation excess plan assets december 31 2006 2005 components net periodic benefit cost 2006 2005 2004 net actuarial losses recorded “accumulated comprehensive income” december 31 2006 related company’s us pension international pension postretirement benefit plans amortized straightline basis approximately nine 13 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2007 company estimates actuarial losses 139 81 amortized accumulated comprehensive income us international pension plans actuarial losses 81 amortized accumulated comprehensive income postretirement benefit plans weighted average amortization period recognizing prior service costs credits recorded december 31 2006 approximately six 13 years us international pension plans respectively seven years postretirement benefit plans 2007 company estimates prior service costs 46 17 amortized accumulated comprehensive income us international pension plans prior service credits 81 amortized accumulated comprehensive income postretirement benefit plans fs50 assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 discount rate expected rate return plan assets reviewed updated needed quarterly basis main us pension plan 2005 discount rate expected return plan assets rate compensation increase reflect remeasurement unocal benefit plans july 31 2005 due acquisition unocal 2006 us discount rate reflects remeasurement july 1 2006 due plan combinations changes primarily merging benefits several unocal plans related chevron plans expected return plan assets company’s estimates longterm rate return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 70 percent company’s pension plan assets december 31 2006 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets measurement date used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2006 company selected 58 percent discount rate based moody’s aa corporate bond index cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve discount rates end 2005 2004 55 percent 58 percent respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2006 main us postretirement medical plan assumed health care costtrend rates start 9 percent 2007 gradually decline 5 percent 2011 beyond measurement december 31 2005 assumed health care costtrend rates started 10 percent 2006 gradually decline 5 percent 2011 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy company’s pension plan weightedaverage asset allocations december 31 asset category follows pension plans invest primarily asset categories sufficient size liquidity cost efficiency permit investments reasonable size pension plans invest asset categories provide diversification benefits easily fs51 measured assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors established following approved asset allocation ranges equities 4070 percent fixed income 2060 percent real estate 015 percent 05 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset category risk equities include investments company’s common stock amount 17 13 december 31 2006 2005 respectively “other” asset category includes minimal investments privateequity limited partnerships cash contributions benefit payments 2006 company contributed 224 225 us international pension plans respectively 2007 company expects contributions approximately 300 200 us international pension plans respectively actual contribution amounts dependent upon planinvestment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 223 2007 compared 211 paid 2006 following benefit payments include estimated future service expected paid next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop discussed total company matching contributions employee accounts within esip 169 145 139 2006 2005 2004 respectively cost reduced value shares released lesop totaling 6 4 138 2006 2005 2004 respectively remaining amounts totaling 163 141 1 2006 2005 2004 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted american institute certified public accountants aicpa statement position 936 employers’ accounting employee stock ownership plans company elected continue practices based aicpa statement position 763 accounting practices certain employee stock ownership plans subsequent consensus eitf fasb debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total credits expenses recorded lesop 1 94 29 2006 2005 2004 respectively including 17 18 23 interest expense related lesop debt credit charge compensation expense 18 76 52 dividends paid lesop shares 59 55 52 used 2006 2005 2004 respectively service lesop debt amount 2006 included 28 lesop debt service scheduled payment first business day january 2007 paid late december 2006 included 2004 amount repayment debt entered 1999 pay interest esop debt interest expense debt recognized reported lesop interest expense 1999 addition company made contributions 2005 98 satisfy lesop debt service excess dividends received lesop contributions required 2006 2004 dividends received lesop sufficient satisfy lesop debt service shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total current year remaining debt service lesop shares december 31 2006 2005 follows fs52 benefit plan trusts texaco established benefit plan trust funding obligations benefit plans yearend 2006 trust contained 142 million shares chevron treasury stock company intends continue pay obligations benefit plans trust sell shares use dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2006 2005 trust assets 98 130 respectively invested primarily interestearning accounts management incentive plans chevron two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred recipients conversion stock units investment fund alternatives aggregate charges expense mip 180 155 147 2006 2005 2004 respectively awards ltip consist stock options sharebased compensation described note 22 incentive plans company program provides eligible employees covered mip ltip annual cash bonus company achieves certain financial safety goals charges programs 329 324 339 2006 2005 2004 respectively note 22 stock options sharebased compensation effective july 1 2005 company adopted provisions financial accounting standards board fasb statement 123r sharebased payment fas 123r sharebased compensation plans company previously accounted plans recognition measurement principles accounting principles board opinion 25 accounting stock issued employees related interpretations dis closure requirements established fasb statement 123 accounting stockbased compensation fas 123 company adopted fas 123r using modified prospective method accordingly results prior periods restated refer note 1 beginning page fs32 pro forma effect net income earnings per share company applied fairvalue recognition provisions fas 123 periods prior adoption fas 123r 2006 2005 compensation expense charged income stock options 125 81 tax 65 42 tax respectively addition compensation expense charged income stock appreciation rights performance units restricted stock units 113 73 tax 59 39 tax 65 42 tax 2006 2005 2004 respectively significant stockbased compensation costs december 31 2006 2005 capitalized cash received option exercises sharebased payment arrangements 2006 2005 2004 444 297 385 respectively actual tax benefits realized tax deductions option exercises 91 71 49 2006 2005 2004 respectively cash paid settle performance units stock appreciation rights 68 110 23 2006 2005 2004 respectively cash paid 2005 included 73 million unocal awards paid changeincontrol plan provisions company presents tax benefits deductions exercise stock options financing cash inflows consolidated statement cash flows second quarter 2006 company implemented transition method fasb staff position fas 123r3 transition election related accounting tax effects sharebased payment awards calculating beginning balance pool excess tax benefits related employee compensation determining subsequent impact pool employee awards fully vested outstanding upon adoption fas 123r company’s reported tax expense period subsequent implementation fas 123r affected election refer note 3 beginning page fs35 information excess tax benefits reported company’s statement cash flows discussion references share price number shares adjusted twoforone stock split september 2004 chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock fs53 option stock appreciation right award requiring full payment shares award recipient stock options stock appreciation rights granted ltip extend 10 years grant date effective options granted june 2002 onethird award vests first second third anniversaries date grant prior change options granted chevron vested one year date grant performance units granted ltip settle cash end threeyear performance period settlement amounts based achievement performance targets relative major competitors period payments indexed company’s stock price texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options retained provision restored enables participant exercises stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted apart restored options awards may granted former texaco plans unocal sharebased plans unocal plans closing acquisition unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights conversion ratio 107 chevron shares unocal share awards retained provisions original unocal plans awards issued prior 2004 generally may exercised three years termination employment depending upon terms individual award agreements original expiration date whichever earlier awards issued since 2004 generally remain exercisable end normal option term termination employment occurs prior august 10 2007 awards issued unocal plans including restricted stock units restricted stock units performance shares became vested acquisition date shares cash issued recipients accordance changeincontrol provisions plans fair market values stock options stock appreciation rights granted 2006 2005 2004 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term represents options converted acquisition date summary option activity 2006 presented total intrinsic value ie difference exercise price market price options exercised 2006 2005 2004 281 258 129 respectively adoption fas 123r company elected amortize newly issued graded awards straightline basis requisite service period accordance fas 123r implementation guidance issued staff securities exchange commission company accelerates vest fs54 ing period retirementeligible employees accordance vesting provisions company’s sharebased compensation programs awards issued adoption fas 123r december 31 2006 99 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period 20 years january 1 2006 number ltip performance units outstanding equivalent 2346016 shares 2006 709200 units granted 827450 units vested cash proceeds distributed recipients 117570 units forfeited december 31 2006 units outstanding 2110196 fair value liability recorded instruments 113 addition outstanding stock appreciation rights awarded various ltip former texaco unocal programs totaled approximately 700000 equivalent shares december 31 2006 liability 16 recorded awards broadbased employee stock options addition plans described chevron granted eligible employees stock options equivalents 1998 options vested two years february 2000 expire 10 years february 2008 total 9641600 options awarded exercise price 3816 per share fair value option date grant estimated 954 using blackscholes model preceding 10 years assumptions used model based 10year average riskfree interest rate 7 percent dividend yield 42 percent expected life seven years volatility 247 percent january 1 2006 number broadbased employee stock options outstanding 1682904 2006 exercises 354845 shares forfeitures 22000 shares reduced outstanding options 1306059 december 31 2006 instruments aggregate intrinsic value 46 remaining contractual term options 11 years total intrinsic value options exercised 2006 2005 2004 10 9 16 respectively note 23 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally finalized individual taxing authorities several years end annual period income taxes calculated us federal income tax liabilities settled 1996 chevron corporation 1997 unocal corporation unocal 2001 texaco corporation texaco california franchise tax liabilities settled 1991 chevron 1998 unocal 1987 texaco settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees december 31 2006 company subsidiaries provided guarantees either directly indirectly 296 notes contractual obligations affiliated companies 131 third parties described major category amounts carried liabilities company’s obligations guarantees 296 guarantees provided affiliates related borrowings capital projects guarantees undertaken achieve lower interest rates generally cover construction periods capital projects included amounts company’s guarantees 214 associated construction completion guarantee debt financing company’s equity interest bakutbilisiceyhan btc crude oil pipeline project substantially 296 guaranteed expire 2007 2011 remaining expiring end 2015 terms guarantees company would required fulfill guarantee affiliate default loan terms generally full amounts disclosed 131 guarantees provided behalf third parties related construction loans governments certain company’s international upstream operations substantially 131 guarantees expire 2011 remainder expiring 2015 company would required perform terms guarantees entity default loan contract terms generally full amounts disclosed december 31 2006 chevron also outstanding guarantees 120 equilon debt leases following february 2002 disposition interest equilon company received indemnification shell claims arising guarantees company recorded liability guarantees approximately 50 percent amounts guaranteed expire within 2007 2011 period guarantees remaining amounts expiring 2019 indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 fs55 end 2006 company paid approximately 48 indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims relating equilon indemnities must asserted either early february 2007 later february 2009 claims relating motiva indemnities must asserted either early february 2007 later february 2012 terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 indemnification agreement company’s liability unlimited april 2022 liability expires acquirer shares certain environmental remediation costs maximum obligation 200 reached december 31 2006 securitization company securitizes certain retail trade accounts receivable downstream business use qualifying special purpose entities spes december 31 2006 approximately 1200 representing 7 percent chevron’s total current accounts notes receivables balance securitized chevron’s total estimated financial exposure securitizations december 31 2006 approximately 80 arrangements effect accelerating chevron’s collection securitized amounts event spes experience major defaults collection receivables chevron believes would loss exposure connected thirdparty investments securitizations longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2007 3200 2008 1700 2009 2100 2010 1900 2011 900 2012 4100 portion commitments may ultimately shared project partners total payments agreements approximately 3000 2006 2100 2005 1600 2004 minority interests company commitments 209 related minority interests subsidiary companies environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2006 1441 included balance remediation activities 242 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation fs56 reserve sites yearend 2006 122 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remaining yearend 2006 environmental reserves balance 1319 834 related approximately 2250 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 485 associated various sites international downstream 117 upstream 252 chemicals 61 55 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2006 recorded liability material company’s financial position results operations liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties effective january 1 2003 company implemented fasb statement 143 accounting asset retirement obligations fas 143 fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability reasonably estimated liability balance approximately 5800 asset retirement obligations yearend 2006 related primarily upstream mining properties refer note 24 page fs58 discussion company’s asset retirement obligations company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation global operations chevron affiliates conduct business activities approximately 180 countries besides united states company affiliates significant operations following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark france india indonesia kazakhstan myanmar netherlands nigeria norway partitioned neutral zone kuwait saudi arabia philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom venezuela vietnam company’s operations particularly exploration production affected changing economic regulatory political environments various countries operates including united states occurred past actions could taken governments increase public ownership company’s partially wholly owned businesses assets impose additional taxes royalties company’s operations certain locations governments imposed restrictions controls taxes others political conditions existed may threaten safety employees company’s continued presence countries internal unrest acts violence strained relations government company governments may affect company’s operations developments times significantly affected company’s related operations results carefully considered management evaluating level current future activity countries equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement fs57 chevron estimates maximum possible net beforetax liability approximately 200 possible maximum net amount could owed chevron estimated 150 timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 24 asset retirement obligations company accounts asset retirement obligations accordance financial accounting standards board statement fasb 143 accounting asset retirement obligations fas 143 accounting standard applies fair value liability asset retirement obligation aro recorded legal obligation associated retirement tangible longlived asset liability reasonably estimated obligations associated retirement assets require recognition certain circumstances 1 present value liability offsetting asset aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates 2005 fasb issued fasb interpretation 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 effective company december 31 2005 fin 47 clarifies phrase “conditional asset retirement obligation” used fas 143 refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control company obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement uncertainty timing andor method settlement conditional aro factored measurement liability sufficient information exists fas 143 acknowledges cases sufficient information may available reasonably estimate fair value aro fin 47 also clarifies entity would sufficient information reasonably estimate fair value aro adopting fin 47 company recognize additional liabilities conditional aros due inability reasonably estimate fair value obligations indeterminate settlement dates fas 143 fin 47 primarily affect company’s accounting crude oil natural gas producing assets significant aros associated legal obligations retire refining marketing transportation downstream chemical longlived assets recognized indeterminate settlement dates asset retirements prevented estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2006 2005 2004 note 25 common stock split september 2004 company effected twoforone stock split form stock dividend total number authorized common stock shares associated par value unchanged action pershare amounts financial statements reflect stock split periods presented effect common stock split reflected consolidated balance sheet “common stock” “capital excess par value” fs58 note 26 financial information net income 2004 included gains approximately 1200 relating sale nonstrategic upstream properties amount 257 related assets classified discontinued operations financial information follows includes 15 2 13 2006 2005 2004 respectively company’s share equity affiliates’ foreign currency effects excess market value carrying value inventories lastin firstout lifo method used 6010 4846 3036 december 31 2006 2005 2004 respectively market value generally based average acquisition costs year lifo profits 82 34 36 included net income years 2006 2005 2004 respectively note 27 earnings per share basic earnings per share eps based upon net income less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 22 “stock options sharebased compensation” beginning page fs53 table following page sets forth computation basic diluted eps fs59 fs60 page intentionally left blank fs61 fiveyear financial summary unaudited pershare amounts periods reflect twoforone stock split effected 100 percent stock dividend september 2004 amount 2003 includes benefit 008 company’s share capital stock transaction dynegy affiliate applicable accounting rules recorded directly retained earnings included net income period fs62 accordance statement fas 69 disclosures oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo asiapacific table costs incurred exploration property acquisitions development1 fs63 geographic area includes activities principally australia azerbaijan bangladesh china kazakhstan myanmar partitioned neutral zone kuwait saudi arabia philippines thailand international “other” geographic category includes activities argentina brazil canada colombia denmark netherlands norway trinidad tobago venezuela united kingdom countries amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies “other” amounts composed 30 percent equity share hamaca exploration production partnership venezuela effective october 2006 chevron’s 39 percent interest 25 percent interest petroboscan petroindependiente respectively joint stock companies involved development boscan ll652 fields venezuela respectively table ii capitalized costs related oil gas producing activities fs64 fs65 company’s results operations oil gas producing activities years 2006 2005 2004 shown following table net income exploration production activities reported page fs38 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs38 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page fs58 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs66 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page fs58 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs67 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates underground reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly executive vice president responsible company’s worldwide exploration production activities rac members knowledgeable sec guidelines proved reserves classification rac coordinates activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities provide independent reviews business units’ recommended reserve changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves fs68 year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee executive committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination provedreserve records documentation alignment corporate reserves manual reserve quantities december 31 2006 oilequivalent reserves company’s consolidated operations 86 billion barrels refer page e11 definition oilequivalent reserves approximately 28 percent total reserves united states company’s interests equity affiliates oilequivalent reserves 3 billion barrels 80 percent associated company’s 50 percent ownership tco year company’s boscan ll652 contracts venezuela converted empresas mixtas ie joint stock contractual structures company previously recorded reserves boscan operations year result conversion ll652 reserves treated sale consolidated company reserves acquisition equity affiliate reserves aside tco operations single property accounted 5 percent company’s total oilequivalent proved reserves fewer 20 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted 36 percent company’s proved reserves total properties geographically dispersed located united states south america west africa middle east asiapacific region united states total oilequivalent reserves yearend 2006 24 billion barrels amount 40 percent 21 percent 39 percent located california gulf mexico us areas respectively california liquids reserves represented 95 percent total classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region liquids represented approximately 64 percent total oilequivalent reserves production operations mostly offshore result also capital intensive costs include investments wells production platforms facilities gathering lines storage facilities us areas reserves split equally liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection pattern net reserve changes shown following tables three years ending december 31 2006 necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans declines oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved underground oil natural gas reserves changes thereto years 2004 2005 2006 shown tables pages fs70 fs72 fs69 net proved reserves crude oil condensate natural gas liquids information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevron significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevron views reserves development integral part total upstream operations however sec regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 443 million barrels december 31 2006 oil sands reserves considered standardized measure discounted future net cash flows conventional oil gas reserves found page fs75 noteworthy amounts categories provedreserve changes 2004 2006 table discussed revisions 2004 net revisions decreased reserves 218 million barrels consolidated companies increased reserves affiliates 204 million barrels consolidated companies decrease composed 161 million barrels international areas 57 million barrels united states largest downward revision internationally 70 million barrels africa one field angola accounted majority net decline changes made oilinplace estimates based reservoir performance data one field asiapacific area essentially accounted 43 millionbarrel downward revision region revision associated reduced well performance part 36 millionbarrel net downward revision indonesia associated effect higher yearend prices calculation reserves costoil recovery productionsharing contract united states 68 millionbarrel net downward revision gulf fs70 mexico area across several fields based mainly reservoir analyses assessments well performance affiliated companies 206 millionbarrel increase tco based updated assessment reservoir performance tengiz field partially offsetting increase downward effect higher yearend prices variable royaltyrate calculation downward revisions also occurred geographic areas effect higher yearend prices various productionsharing terms variable royalty calculations 2005 net revisions reduced reserves 239 million 24 million barrels worldwide consolidated companies equity affiliates respectively consolidated companies net decrease 199 million barrels international areas 40 million barrels united states largest downward net revisions internationally 108 million barrels indonesia 53 million barrels kazakhstan due primarily effect higher yearend prices calculation reserves associated productionsharing variableroyalty contracts united states 40 millionbarrel reduction across many fields geographic sections downward revision affiliated companies 19 millionbarrel reduction hamaca attributable revised government royalty provisions tco downward effect higher yearend prices partially offset increased reservoir performance 2006 net revisions increased reserves 39 million 84 million barrels worldwide consolidated companies equity affiliates respectively international consolidated companies accounted net increase 39 million barrels largest upward net revisions 61 million barrels indonesia 27 million barrels thailand indonesia increase result infill drilling improved steamflood performance upward revision thailand reflected additional drilling development activity year upward revisions partially offset reductions reservoir performance nigeria united kingdom decreased reserves 43 million barrels 32 million barrels respectively upward revision affiliated companies related 60 million barrel increase tco result improved reservoir performance improved recovery 2006 improved recovery increased liquids volumes worldwide 83 million barrels consolidated companies reserves united states increased 52 million barrels california representing 49 million barrels total increase due steamflood expansion revised modeling activities internationally improved recovery increased reserves 31 million barrels single country accounting increase 10 million barrels extensions discoveries 2006 extensions discoveries increased liquids volumes worldwide 107 million barrels consolidated companies reserves nigeria increased 27 million barrels due part initial booking reserves aparo field additional drilling activities contributed 19 million barrels united kingdom 14 million barrels argentina united states gulf mexico added 25 million barrels mainly result initial booking great white field deepwater perdido fold belt area purchases 2005 acquisition 572 million barrels liquids related solely acquisition unocal august threefourths 376 million barrels acquired international areas represented volumes azerbaijan thailand volumes acquired united states texas alaska 2006 acquisitions increased liquids volumes worldwide 21 million barrels consolidated companies 119 million barrels equity affiliates consolidated companies amount mainly result new agreements nigeria added 13 million barrels reserves otherequityaffiliates quantity reflects result conversion boscan ll652 operations joint stock companies venezuela sales 2004 sales liquids volumes reduced reserves consolidated companies 179 million barrels sales totaled 130 million barrels united states 33 million barrels “other” international region sales “other” region united states totaled 103 million barrels two fields accounting approximately onehalf volume 27 million barrels sold gulf mexico reflect sale number shelf properties “other” international sales include disposal western canada properties several fields united kingdom sales associated company’s program dispose assets deemed nonstrategic portfolio producing properties 2005 sales 58 million barrels “other” international area related disposition former unocal operations onshore canada 2006 sales decreased reserves 15 million barrels due conversion ll652 risked service agreement joint stock company venezuela fs71 net proved reserves natural gas noteworthy amounts categories provedreserve changes 2004 2006 table discussed revisions 2004 revisions increased reserves consolidated companies net 248 billion cubic feet bcf composed increases 928 bcf internationally decreases 680 bcf united states internationally half 346 bcf increase africa related properties nigeria changes associated well performance reviews development drilling lease fuel calculations 236 bcf addition asiapacific region related primarily reservoir analysis single field 325 bcf “other” international area related new gas sales contract trinidad tobago united states net 391 bcf downward revision gulf mexico related wellperformance reviews technical analyses several fields net 316 bcf negative revision “other” us area related two coal bed methane fields midcontinent region associated wells’ performance 963 bcf increase tco connected updated analyses reservoir performance processing plant yields 2005 reserves revised downward 14 bcf consolidated companies 498 bcf equity affiliates consolidated companies negative revisions 428 bcf asiapacific region decrease attribut fs72 able one field kazakhstan due mainly effects higher yearend prices variableroyalty provisions productionsharing contract reserves additions consolidated companies totaled 211 bcf 243 bcf africa “other” respectively majority african region changes angola due revised forecast fuel gas usage nigeria improved reservoir performance availability thirdparty compression colombia accounted increase “other” region revisions united states decreased reserves 9 bcf nominal increases san joaquin valley offset decreases gulf mexico “other” region tco affiliate kazakhstan reduction 547 bcf reflects updated forecast future royalties payable yearend price effects partially offset volumes added result updated assessment reservoir performance 2006 revisions accounted net increase 481 bcf consolidated companies 26 bcf affiliates consolidated companies net increases 511 bcf internationally partially offset 30 bcf downward revision united states drilling development activities added 337 bcf reserves thailand kazakhstan added 200 bcf largely due development activity trinidad tobago increased 185 bcf attributable improved reservoir performance new contract sales natural gas additions partially offset downward revisions 224 bcf united kingdom 130 bcf australia due drilling results reservoir performance us “other” downward revision 102 bcf due reservoir performance partially offset upward revisions 72 bcf gulf mexico california related reservoir performance development drilling tco upward revision 26 bcf associated additional development activity updated reservoir performance extensions discoveries 2004 extensions discoveries accounted increase 214 bcf reflecting increase united states 144 bcf 89 bcf added “other” region 54 bcf added gulf mexico drilling activities large number fields 2005 consolidated companies increased reserves 370 bcf including 167 bcf united states 118 bcf asiapacific region united states 99 bcf added “other” region 68 bcf gulf mexico primarily due drilling activities addition asiapacific resulted primarily increased drilling kazakhstan 2006 extensions discoveries accounted increase 799 bcf consolidated companies reflecting 531 bcf increase outside united states us increase 268 bcf bangladesh added 451 bcf result development activity field extensions thailand added 59 bcf result drilling activities us “other” contributed 157 bcf approximately half related south texas piceance basin gulf mexico added 111 bcf partly due initial booking reserves great white field deepwater perdido fold belt area purchases 2005 except 7 bcf 5656 bcf total purchases associated unocal acquisition international reserve acquisitions 4488 bcf thailand accounting half volumes significant volumes added bangladesh myanmar 2006 acquisition natural gas reserves 35 bcf consolidated companies evenly divided company’s united states international operations affiliated companies added 54 bcf reserves result conversion operating service agreement joint stock company venezuela sales 2004 sales consolidated companies totaled 547 bcf total 436 bcf united states 111 bcf “other” international region united states “other” region sales accounted 289 bcf reflecting disposal large number smaller properties including coal bed methane field gulf mexico sales 147 bcf reflected sale shelf properties four fields accounting onethird total sales “other” international region reflected disposition properties western canada united kingdom 2005 sales 248 bcf “other” international region related disposition formerunocal’s onshore properties canada 2006 sales consolidated companies totaled 149 bcf mostly associated conversion risked service agreement joint stock company venezuela fs73 standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs74 fs75 changes present values years significant reflect changes estimated proved reserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs76 exhibit index e1 filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 39 schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 15 consolidated financial statements beginning page fs43 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 28th day february 2008 chevron corporation david j o’reilly david j o’reilly chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 28th day february 2008 page intentionally left blank index management’s discussion analysis consolidated financial statements supplementary data fs1 key financial results income major operating area refer “results operations” section beginning page fs6 detailed discussion financial results major operating area three years ending december 31 2007 business environment outlook chevron global energy company significant business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark france india indonesia kazakhstan myanmar netherlands nigeria norway partitioned neutral zone saudi arabia kuwait philippines qatar republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam current future earnings company depend largely profitability upstream exploration production downstream refining marketing transportation business segments single biggest factor affects results operations segments movement price crude oil downstream business crude oil largest cost component refined products overall trend earnings typically less affected results company’s chemicals business activities investments earnings company period may also influenced events transactions infrequent andor unusual nature chevron oil gas industry large continue experience increase certain costs exceeds general trend inflation many areas world increase costs affecting company’s operating expenses capital expenditures particularly upstream business company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries sustain longterm competitive position upstream business company must develop replenish inventory projects offer adequate financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments current environment higher commodity prices certain governments sought renegotiate contracts impose additional costs company governments may attempt future company continue monitor developments take account evaluating future investment opportunities otherwise seek mitigate risks company’s current operations future prospects company also continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s growth asset sales 2007 included company’s 31 percent ownership interest refinery related assets netherlands fuels marketing businesses belgium luxembourg netherlands uruguay investment common stock dynegy inc asset dispositions restructurings may occur future periods could result significant gains losses comments related earnings trends company’s major business areas follows fs2 upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments attempts manage risks operating facilities business price levels capital exploratory costs operating expenses associated efficient production crude oil natural gas also subject external factors beyond company’s control external factors include general level inflation also prices charged industry’s material serviceproviders affected volatility industry’s supply demand conditions materials services oil gas industry worldwide experienced significant price increases items since 2005 future price increases may continue exceed general level inflation capital exploratory expenditures operating expenses also affected damages production facilities caused severe weather civil unrest industry price levels crude oil increased 2007 spot price west texas intermediate wti crude oil benchmark crude oil averaged 72 per barrel 2007 approximately 6 per barrel 2006 average price rise crude oil prices attributed primarily increasing demand growing economies heightened level geopolitical uncertainty areas world supply concerns key producing regions midfebruary 2008 wti price 93 per barrel 2006 wide differential prices existed 2007 highquality ie highgravity low sulfur crude oils lower quality ie lowgravity heavier types crude price heavier crudes dampened ample supply lower relative demand due limited number refineries able process lowerquality feedstock light products ie motor gasoline jet fuel aviation gasoline diesel fuel price higherquality crude oil remained high demand light products easily manufactured refineries highquality crude oil strong worldwide chevron produces shares production heavy crude oil california chad indonesia partitioned neutral zone saudi arabia kuwait venezuela certain fields angola china united kingdom north sea refer page fsl0 company’s average us international crude oil prices contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supply demand conditions markets united states 2007 benchmark prices henry hub averaged 7 per thousand cubic feet mcf compared 650 2006 midfebruary 2008 henry hub price 8 per mcf fluctuations price natural gas united states closely associated volumes produced north america inventory underground storage relative customer demand us natural gas prices also typically higher winter period demand heating greatest certain regions world company operates different supply demand regulatory circumstances typically resulting significantly lower average sales prices company’s production natural gas refer page fsl0 company’s average natural gas prices us international regions additionally excesssupply conditions exist certain parts world cannot easily serve mitigate relatively high fs3 price conditions united states markets lack infrastructure transport receive liquefied natural gas help address regional imbalance supply demand natural gas chevron planning increased investments longterm projects areas excess supply install infrastructure produce liquefy natural gas transport tanker along investments commitments regasify product markets demand strong supplies plentiful due significance overall investment longterm projects natural gas sales prices areas excess supply natural gas transferred companyowned thirdparty processing facility expected remain well sales prices natural gas produced much nearer areas high demand transported existing natural gas pipeline networks united states besides impact fluctuation price crude oil natural gas longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax rates income cost goods services chevron’s worldwide net oilequivalent production 2007 including volumes produced oil sands averaged 262 million barrels per day decline 48000 barrels per day 2006 due mainly effect conversion operating service agreements venezuela jointstock companies refer table “selected operating data” page fsl0 listing production volumes three years ending december 31 2007 company estimates oilequivalent production 2008 average approximately 265 million barrels per day estimate subject many uncertainties including quotas may imposed opec price effect production volumes calculated costrecovery variableroyalty provisions certain contracts changes fiscal terms restrictions scope company operations delays project startups weather conditions may shut production civil unrest changing geopolitics disruptions operations future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production chevron’s upstream investment currently made outside united states investments upstream projects generally made well advance start associated crude oil natural gas production approximately 28 percent company’s net oilequivalent production 2007 occurred opecmember countries angola indonesia nigeria venezuela partitioned neutral zone saudi arabia kuwait opec quotas significantly affect chevron’s production level 2007 impact opec quotas company’s production 2008 uncertain october 2006 chevron’s boscan ll652 operating service agreements venezuela converted empresas mixtas ie jointstock companies petróleos de venezuela sa pdvsa majority shareholder time chevron reported equity share boscan ll652 production approximately 85000 barrels per day less company previously reported operating service agreements change empresa mixta structure material effect company’s results operations consolidated financial position liquidity february 2007 president venezuela issued decree announcing government’s intention pdvsa take operational control orinoco heavy oil associations effective may 1 2007 increase ownership associations minimum 60 percent decree included chevron’s 30 percentowned hamaca project april 2007 chevron signed memorandum understanding mou pdvsa summarized ongoing discussions transfer control hamaca operations accordance february decree provided mou pdvsacontrolled transitory operational committee chevron representation assumed responsibility daily operations may 1 2007 mou stipulated terms existing contracts remain place transition period december 2007 chevron executed conversion agreement signed charter bylaws pdvsa subsidiary provided chevron retain 30 percent interest hamaca project new entity petropiar commenced activities january 2008 conversion agreement material effect chevron’s results operations consolidated financial position liquidity refer pages fs6 fs7 additional discussion company’s upstream operations downstream earnings downstream segment closely tied margins refining marketing products include gasoline diesel jet fuel lubricants fuel oil feedstocks chemical manufacturing industry margins sometimes volatile affected global regional supplyanddemand balance refined products changes price crude oil used refinery feedstock industry margins also influenced refinedproduct inventory levels geopolitical events refinery maintenance programs disruptions refineries resulting unplanned outages may due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing network effectiveness crudeoil fs4 productsupply functions economic returns invested capital profitability also affected volatility tanker charter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refinery distribution network company’s significant marketing areas west coast north america us gulf coast latin america asia subsaharan africa united kingdom chevron operates ownership interests refineries areas except latin america industry refinedproduct margins generally higher 2007 2006 company us refinedproduct margins 2007 negatively affected planned unplanned downtime three largest us refineries industry margins future may volatile influenced changes price crude oil used refinery feedstock changes supply demand crude oil refined products industry supply demand balance affected disruptions refineries resulting maintenance programs unplanned outages including weatherrelated disruptions refinedproduct inventory levels geopolitical events refer page fs7 fs8 additional discussion company’s downstream operations chemicals earnings petrochemicals business closely tied global chemical demand industry inventory levels plant capacity utilization feedstock fuel costs tend follow crude oil natural gas price movements also influence earnings segment refer page fs8 additional discussion chemicals earnings operating developments key operating developments events 2007 early 2008 included following upstream angola discovered crude oil 31 percentowned operated malange1 well offshore block 14 additional drilling geologic engineering studies planned appraise discovery company partners also made final investment decision construct liquefied natural gas lng plant owned 36 percent chevron plant designed capacity process 1 billion cubic feet natural gas per day produce 52 million metric tons year lng related gas liquids products australia received federal state environmental approvals development 50 percentowned operated gorgon lng project located northwest coast approvals represented significant milestone towards development company’s natural gas resources offshore australia bangladesh began production 98 percentowned bibiyana natural gas field’s total production expected increase maximum 500 million cubic feet per day 2010 china signed 30year productionsharing contract china national petroleum corporation assume operatorship hold 49 percent interest development chuandongbei natural gas area central china design input capacity proposed gas plants expected 740 million cubic feet natural gas per day indonesia began commercial operation 1l0megawatt darajat iii geothermal power plant garut west java plant increased darajat’s total capacity 259 megawatts kazakhstan initiated production first phase sour gas injection second generation plant expansion projects 50 percentowned tengiz field phase increased production capacity 90000 barrels crude oil per day approximately 400000 full facility expansion expected occur secondhalf 2008 increasing production capacity 540000 barrels per day republic congo confirmed two crude oil discoveries offshore mohobilondo permit evaluation development studies undertaken appraise discoveries chevron holds 32 percent nonoperated working interest thailand signed agreement increase sales natural gas companyoperated blocks 10 11 12 13 gulf thailand ptt public company limited chevron ownership interests ranging 60 percent 80 percent blocks received 10year productionperiod extensions 2022 company also granted concession rights sixyear period four prospective offshore petroleum blocks three operate trinidad tobago signed agreement sell natural gas national gas company trinidad tobago 11 years option fouryear extension gas expected sourced chevron’s 50 percentowned east coast marine area united states announced first production tahiti project deepwater gulf mexico expected third quarter 2009 startup approximately one year later originally planned due metallurgical problems mooring shackles floating production facility downstream benelux countries sold company’s 31 percent interest nerefco refinery related assets netherlands company’s fuels marketing businesses belgium luxembourg netherlands resulting gains totaling 960 million fs5 south korea completed construction commissioned new facilities associated 15 billion upgrade 50 percentowned gs caltex yeosu refinery enabling refinery process heavier highersulfur crude oils increase production gasoline diesel light products united states approved plans company’s refinery pascagoula mississippi construction continuous catalyst regeneration unit expected increase gasoline production 10 percent 600000 gallons per day mid2010 refinery el segundo california modifications completed enable processing heavier crude oils light transportation fuels refined products common stock dividends increased company’s quarterly common stock dividend 115 percent april 058 per share marking 20th consecutive year company increased annual dividend payment common stock repurchase program approved program september acquire 15 billion company’s common stock period three years followed three stock repurchase programs 5 billion completed 2005 2006 september 2007 dynegy sold company’s common stock investment dynegy inc resulting gain 680 million results operations major operating areas following section presents results operations company’s business segments upstream downstream chemicals well “all other” includes mining power generation businesses various companies departments managed corporate level company’s investment dynegy prior sale may 2007 income also presented us international geographic areas upstream downstream business segments refer note 8 beginning page fs37 discussion company’s “reportable segments” defined fasb 131 disclosures segments enterprise related information section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream exploration production us upstream income 45 billion 2007 increased approximately 260 million 2006 results 2007 benefited approximately 700 million higher prices crude oil natural gas liquids benefit income partially offset effects decline oilequivalent production increase depreciation operating exploration expenses income 43 billion 2006 increased approximately 100 million 2005 earnings 2006 benefited 850 million higher average prices oilequivalent production effect seven additional months production unocal properties acquired august 2005 substantially offsetting benefits increases operating exploration depreciation expenses included operating expense increases costs associated carryover effects hurricanes gulf mexico 2005 company’s average realization crude oil natural gas liquids 2007 6316 per barrel compared 5666 2006 4697 2005 average natural gas realization 612 per thousand cubic feet 2007 compared 629 743 2006 2005 respectively net oilequivalent production 2007 averaged 743000 barrels per day 26 percent 2006 2 percent 2005 included five months production unocal properties acquired august year net liquids component oilequivalent production 2007 averaged 460000 barrels day essentially flat compared 2006 increase 1 percent 2005 net natural gas production averaged 17 billion cubic feet per day 2007 6 percent 2006 4 percent 2005 fs6 refer “selected operating data” table page fs10 threeyear comparative production volumes united states international upstream exploration production international upstream income 103 billion 2007 increased 14 billion 2006 earnings 2007 benefited approximately 16 billion higher prices primarily crude oil 300 million increased liftings nonrecurring income tax items also benefited earnings periods benefits income partially offset impact higher operating depreciation expenses income 2006 approximately 89 billion increased 13 billion 2005 earnings 2006 benefited approximately 3 billion higher prices crude oil natural gas additional seven months production former unocal properties 70 percent benefit associated impact higher prices substantially offsetting benefits increases depreciation expense operating expense exploration expense also adversely affecting 2006 income higher taxes related increase tax rates uk venezuela settlement tax claims tax items venezuela angola chad foreign currency effects reduced earnings 371 million 2006 increased income 14 million 2005 company’s average realization crude oil natural gas liquids 2007 6501 per barrel compared 5765 2006 4759 2005 average natural gas realization 390 per thousand cubic feet 2007 compared 373 319 2006 2005 respectively net oilequivalent production 188 million barrels per day 2007 declined 2 percent 2006 increased 5 percent 2005 volumes year included production oil sands canada operating service agreement venezuela conversion jointstock company october 2006 decline 2006 2007 associated impact contract conversion venezuela price effects production volumes calculated productionsharing agreements partially offsetting decline increased production bangladesh angola azerbaijan increase 2005 due year included five months production former unocal properties net liquids component oilequivalent production 13 million barrels per day 2007 decrease approximately 4 percent 2006 3 percent 2005 net natural gas production 33 billion cubic feet per day 2007 55 percent 28 percent 2006 2005 respectively refer “selected operating data” table page fs10 threeyear comparative international production volumes us downstream refining marketing transportation us downstream earnings 966 million 2007 declined nearly 1 billion 2006 essentially 2005 decline 2007 2006 associated mainly weaker refinedproduct margins due effects higher crude oil prices negative impacts higher planned unplanned downtime refinery production volumes company’s three major refineries operating expenses also higher 2007 improvement 2006 earnings 2005 primarily associated higher average refinedproduct margins 2006 adverse effect downtime 2005 refining marketing pipeline operations caused hurricanes gulf mexico sales volumes refined products 146 million barrels per day 2007 decrease 3 percent 1 percent 2006 2005 respectively reported sales volume 2007 different basis 2006 2005 due change accounting rules became effective april 1 2006 certain purchase sale buysell contracts counterparty excluding impact accounting standard refinedproduct sales 2007 decreased 1 percent 2006 increased 5 percent 2005 branded gasoline sales volumes 629000 barrels per day 2007 increased 2 percent 2006 6 percent 2005 largely due growth texaco brand refer “selected operating data” table page fsl0 threeyear comparative sales volumes gasoline refined products refineryinput volumes refer also note 13 “accounting buysell contracts” page fs42 discussion accounting purchase sale contracts counterparty fs7 international downstream refining marketing transportation international downstream income 25 billion 2007 increased 500 million 2006 750 million 2005 results 2007 included gains approximately 1 billion sale assets including interest refinery marketing assets benelux region europe margins sale refined products 2007 slightly prior year operating expenses higher earnings company’s shipping operations lower increase earnings 2006 compared 2005 associated mainly benefit higher refinedproduct sales margins asiapacific area canada improved results crudeoil refinedproduct trading activities refinedproduct sales volumes 203 million barrels per day 2007 5 percent 10 percent lower 2006 2005 respectively due largely impact asset sales accountingstandard change buysell contracts excluding accounting change sales decreased 4 percent 5 percent 2006 2005 respectively refer “selected operating data” table page fs10 threeyear comparative sales volumes gasoline refined products refineryinput volumes refer also note 13 “accounting buysell contracts” page fs42 discussion accounting purchase sale contracts counterparty chemicals segment includes company’s oronite subsidiary 50 percentowned chevron phillips chemical company llc cpchem 2007 earnings 396 million compared 539 million 298 million 2006 2005 respectively 2006 2007 benefit improved margins sales lubricants fuel additives oronite offset effect lower margins sale commodity chemicals cpchem 2006 earnings 539 million increased 240 million 2005 due higher margins commodity chemicals cpchem fuel lubricant additives oronite includes mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies company’s interest dynegy prior sale may 2007 net charges 26 million 2007 decreased 490 million 2006 results 2007 included 680 million gain sale company’s investment dynegy common stock loss approximately 175 million associated early redemption texaco capital inc bonds excluding items effects foreign currency net charges decreased 40 million periods net charges 516 million 2006 decreased 173 million 689 million 2005 excluding effects foreign currency net charges declined 60 million periods primarily due higher interest income lower interest expense 2006 fs8 consolidated statement income comparative amounts certain income statement categories shown sales operating revenues 2007 increased 2006 due primarily higher prices crude oil natural gas natural gas liquids refined products partially offset lower sales volumes increase 2006 2005 primarily due higher prices refined products higher revenues 2006 net impact change accounting buysell contracts described note 13 page fs42 lower income equity affiliates 2007 mainly due decline earnings cpchem dynegy sold may 2007 downstream affiliates asiapacific area partially offsetting declines improved results tengizchevroil tco income full year petroboscan converted operating service agreement jointstock company october 2006 increase 2005 2006 primarily due improved results tco cpchem refer note 11 beginning page fs40 discussion chevron’s investment affiliated companies income nearly 27 billion 2007 included net gains totaling 17 billion sale downstream assets benelux countries company’s investment dynegy loss approximately 245 million early redemption texaco debt interest income approximately 600 million 600 million 400 million 2007 2006 2005 respectively foreign currency losses 352 million 260 million 60 million corresponding years crude oil product purchases 2007 increased 2006 due higher prices crude oil natural gas natural gas liquids refined products crude oil product purchases 2006 increased 2005 higher prices crude oil refined products inclusion unocalrelated amounts full year 2006 vs five months 2005 increase mitigated effect accounting change april 2006 buysell contracts operating selling general administrative expenses 2007 increased 16 percent year earlier expenses higher number categories largest increases recorded cost employee payroll contract labor total expenses increased 2006 2005 due mainly inclusion formerunocal expenses full year 2006 besides effect expenses higher 2006 labor transportation uninsured costs associated hurricanes 2005 exploration expenses 2007 declined 2006 mainly due lower amounts well writeoffs geological geophysical costs operations outside united states expenses increased 2006 2005 due higher amounts well writeoffs geological geophysical costs operations outside united states well inclusion unocalrelated amounts full year 2006 depreciation depletion amortization expenses increased 2005 2007 reflecting increase charges related asset writedowns higher depreciation rates certain crude oil natural gas producing fields worldwide inclusion unocalrelated amounts beginning august 2005 taxes income increased 2007 year earlier due higher duties company’s uk downstream operations taxes income essentially unchanged 2006 2005 effect higher us refined product sales offset lower sales volumes subject duties company’s european downstream operations interest debt expense 2007 decreased 2006 primarily due lower average debt balances higher amounts interest capitalized decrease 2006 vs 2005 mainly due lower average debt balances increase amount interest capitalized partially offset higher average interest rates commercial paper variablerate debt fs9 effective income tax rates 42 percent 2007 46 percent 2006 44 percent 2005 rates lower 2007 compared prior year due mainly impact nonrecurring items including asset sales 2007 absence 2006 charges related taxlaw change increased tax rates upstream operations uk north sea settlement tax claim venezuela higher tax rate 2006 compared 2005 also reflected nonrecurring charges 2006 refer also discussion income taxes note 15 beginning page fs43 selected operating data12 fs10 liquidity capital resources cash equivalents marketable securities total balances 81 billion 114 billion december 31 2007 2006 respectively cash provided operating activities 2007 250 billion compared 243 billion 2006 201 billion 2005 cash provided operating activities net contributions employee pension plans 300 million 400 million 10 billion 2007 2006 2005 respectively cash provided investing activities included proceeds asset sales 33 billion 2007 10 billion 2006 27 billion 2005 cash provided operating activities asset sales 2007 sufficient fund company’s 177 billion capital exploratory program pay 48 billion dividends stockholders repay approximately 37 billion debt restricted cash 799 million associated capitalinvestment projects company’s pascagoula mississippi refinery angola liquefied natural gas project invested shortterm marketable securities reclassified cash equivalents longterm asset consolidated balance sheet dividends company paid dividends approximately 48 billion 2007 44 billion 2006 38 billion 2005 april 2007 company increased quarterly common stock dividend 115 percent 58 cents per share debt capital lease minority interest obligations total debt capital lease balances 72 billion december 31 2007 98 billion yearend 2006 company also minority interest obligations 204 million 209 million december 31 2006 26 billion reduction total debt capital lease obligations 2007 included early redemption maturity individual debt issues february 144 million texaco capital inc bonds matured second fourth quarters company redeemed approximately 809 million 65 million respectively texaco capital inc debt recognized aftertax loss approximately 175 million august 2 billion chevron canada funding company bonds matured december company issued 650 million tax exempt mississippi gulf opportunity zone bond fund upgrade project company’s refinery pascagoula mississippi commercial paper balances end 2007 declined approximately 450 million 35 billion yearend 2006 february 2008 750 million chevron canada funding company bonds matured company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 55 billion december 31 2007 66 billion yearend 2006 amounts 44 billion 45 billion reclassified longterm end period respectively yearend 2007 settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis yearend 2007 company 5 billion committed credit facilities various major banks permit refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2007 march 2007 company filed securities exchange commission sec automatic registration statement expires march 2010 registration statement unspecified amount nonconvertible debt securities issued guaranteed company time company withdrew three shelf registration statements file sec permitted issuance 38 billion debt securities december 31 2007 company outstanding public bonds issued chevron corporation profit sharingsavings plan trust fund chevron canada funding company formerly chevrontexaco capital company texaco capital inc union oil company california securities guaranteed chevron corporation rated aa standard poor’s corporation aal moody’s investors service rating moody’s reflects upgrade december aa2 company’s us commercial paper rated al standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions company believes substantial borrowing capacity meet unanticipated cash fs11 requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program 5 billion stock repurchase program initiated december 2006 completed september 2007 615 million common shares acquired program total cost 49 billion upon completion program company authorized acquisition 15 billion additional common shares time prevailing prices permitted securities laws legal requirements subject market conditions factors program period three years may discontinued time december 31 2007 235 million shares acquired new program 21 billion purchases midfebruary 2008 increased total shares acquired 342 million cost approximately 30 billion capital exploratory expenditures total reported expenditures 2007 20 billion including 23 billion company’s share affiliates’ expenditures require cash outlays company 2006 2005 expenditures 166 billion 111 billion respectively including company’s share affiliates’ expenditures 19 billion 17 billion corresponding periods 2005 amount excludes 173 billion acquisition unocal corporation 20 billion expenditures 2007 threefourths 155 billion related upstream activities approximately percentage also expended upstream operations 2006 2005 international upstream accounted 70 percent worldwide upstream investment three years reflecting company’s continuing focus opportunities available outside united states 2008 company estimates capital exploratory expenditures 15 percent higher 229 billion including 26 billion spending affiliates threefourths total 175 billion budgeted exploration production activities 127 billion amount outside united states spending 2008 primarily targeted exploratory prospects deepwater gulf mexico western africa major development projects angola australia brazil indonesia kazakhstan nigeria thailand deepwater gulf mexico piceance basin colorado oil sands project canada worldwide downstream spending 2008 estimated 41 billion 23 billion projects united states capital projects include upgrades refineries united states south korea construction gastoliquids facilities support associated upstream projects investments chemicals technology corporate businesses 2008 budgeted 13 billion technology investments include projects related unconventional hydrocarbons technologies oil gas reservoir management gasfired renewable power generation capital exploratory expenditures fs12 pension obligations 2007 company’s pension plan contributions 317 million approximately 78 million us plans company estimates contributions 2008 approximately 500 million actual contribution amounts dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs18 financial ratios financial ratios current ratio current assets divided current liabilities current ratio periods adversely affected fact chevron’s inventories valued lastinfirstout basis yearend 2007 book value inventory lower replacement costs based average acquisition costs year approximately 7 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs company’s interest coverage ratio higher 2007 2006 2005 primarily due higher beforetax income lower average debt balances subsequent years debt ratio total debt percentage total debt plus equity progressive decrease 2005 2007 due lower average debt levels higher stockholders’ equity balances guarantees offbalancesheet arrangements contractual obligations contingencies direct guarantee company’s guarantee approximately 600 million associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduce time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron carries liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2007 company paid 48 million indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims must asserted later february 2009 equilon indemnities later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 indemnification agreement company’s liability unlimited april 2022 indemnification expires acquirer shares certain environmental remediation costs maximum fs13 obligation 200 million reached december 31 2007 securitization 2007 company completed sale us proprietary consumer credit card business related receivables transaction included terminating qualifying special purpose entity spe used securitize associated retail accounts receivable use another qualifying spe company 675 million securitized trade accounts receivable related downstream business december 31 2007 arrangement effect accelerating chevron’s collection securitized amounts chevron’s total estimated financial exposure securitization december 31 2007 65 million event spe experiences major defaults collection receivables chevron believes would additional loss exposure connected thirdparty investments securitization minority interests company commitments 204 million related minority interests subsidiary companies longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2008 47 billion 2009 33 billion 2010 33 billion 2011 19 billion 2012 13 billion 2013 49 billion portion commitments may ultimately shared project partners total payments agreements approximately 37 billion 2007 30 billion 2006 21 billion 2005 following table summarizes company’s significant contractual obligations contractual obligations include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become due company expect settlement liabilities material effect results operations consolidated financial position liquidity single period 44 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20092011 period include obligations purchase company’s share natural gas liquids regasified natural gas associated operations 364 percentowned angola lng affiliate lng plant expected commence operations 2012 designed produce 52 million metric tons liquefied natural gas related natural gas liquids per year volumes prices associated purchase obligations neither fixed determinable financial derivative instruments material change market risk occurred 2006 2007 financial derivative instruments discussed hypothetical variances used section selected illustrative purposes represent company’s estimation market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part 1 item 1a company’s 2007 annual report form 10k commodity derivative instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activity material company’s financial position net income cash flows 2007 fs14 company’s market exposure positions monitored managed daily basis internal risk control group ensure compliance company’s risk management policies approved audit committee company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures options swap contracts traded nymex new york mercantile exchange electronic platforms ice intercontinental exchange globex chicago mercantile exchange addition crude oil natural gas refined product swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes effective 2007 yearend reporting company changed model used quantify information market risk commodity derivatives “sensitivity analysis” approach valueatrisk var major reason change var allows estimation portfolio’s aggregate market risk exposure takes account correlations trading assets therefore reflects risk reduction due diversification hedging activities company’s market positions time commodity spreads company believes var accurate tool measure type exposure sensitivity analysis model company fully developed tested var model 2007 var maximum loss exceeded within given probability confidence level given period time company’s var model uses monte carlo simulation method involves generating hypothetical scenarios specified probability distribution constructing full distribution potential portfolio’s values var model utilizes exponentiallyweighted moving average computing historical volatilities correlations 95 percent confidence level oneday holding period company’s 95 percent oneday var corresponds unrealized loss portfolio value would exceeded average one every 20 trading days portfolio held constant one day oneday holding period based assumption marketrisk positions liquidated hedged within one day hedging risk management company uses conventional exchangetraded instruments futures options well nonexchangetraded swaps liquidated hedged effectively within one day table presents 95 percentoneday var company’s primary risk exposures area commodity derivative instruments december 31 2007 sensitivity analysis company’s open commodity derivative instruments december 31 2007 december 31 2006 based hypothetical 10 percent increase commodity prices provided following table incremental increase decrease fair value open commodity derivative contracts assuming hypothetical increase yearend commodity prices 10 percent hypothetical decrease prices commodities would result approximately opposite effects fair values contracts hypothetical effect contracts estimated calculating fair value contracts difference hypothetical current market prices multiplied contract amounts change amounts years table crude oil refined products associated increase commodity prices volumes hedged use longerterm contracts foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect hypothetical 10 percent increase value us dollar yearend 2007 would reduction fair value foreign exchange contracts approximately 75 million effect would opposite hypothetical 10 percent decrease value us dollar yearend 2007 interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2007 company interestrate swaps floatingrate debt yearend 2007 weighted average maturity “receive fixed” interest rate swaps less one year hypothetical increase decrease 10 basis points fixed interest rates would de minimis impact fair value “receive fixed” swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements place company’s refining affiliate fs15 thailand refer page fs5 discussion management believes foregoing agreements others negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive company party 88 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepages mtbe groundwater chevron agreed principle tentative settlement 60 pending lawsuits claims terms agreement must approved number parties including court confidential material company’s results operations liquidity financial position resolution remaining lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future tentative settlement referenced 60 lawsuits set precedents related standards liability used judge merits claims corrective measures required monetary damages assessed remaining lawsuits claims future lawsuits claims result company’s ultimate exposure related pending lawsuits claims currently determinable could material net income one period company longer uses mtbe manufacture gasoline united states rfg patent fourteen purported class actions brought consumers reformulated gasoline rfg alleging unocal misled california air resources board adopting standards composition rfg overlapped unocal’s undisclosed pending patents eleven lawsuits consolidated us district court central district california class action certified three consolidated state court action unocal alleged monopolized conspired engaged unfair methods competition resulting injury consumers rfg plaintiffs consolidated actions seek unspecified actual punitive damages attorneys’ fees interest behalf alleged class consumers purchased “summertime” rfg california january 1995 august 2005 parties reached tentative agreement resolve matters amount material company’s results operations liquidity financial position terms agreement confidential subject negotiation approval including courts environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies fs16 following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws included 1539 million yearend 2007 reserve balance remediation activities 240 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2007 123 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remaining yearend 2007 environmental reserves balance 1416 million 864 million related approximately 2000 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 552 million associated various sites international downstream 146 million upstream 267 million chemicals 105 million 34 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2007 recorded liability material company’s financial position results operations liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company accounts asset retirement obligations accordance financial accounting standards board statement fasb 143 accounting asset retirement obligations fas 143 fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability reasonably estimated liability balance approximately 83 billion asset retirement obligations yearend 2007 related primarily upstream mining properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 23 beginning page fs57 related fas 143 company’s adoption 2005 fasb interpretation fin 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 discussion “environmental matters” page fs18 income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs43 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions december 31 2007 company approximately 17 billion suspended exploratory wells included properties plant equipment increase 421 million 2006 increase 551 million 2005 future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 17 billion suspended wells yearend 2007 uncertain pending future activities including normal project evaluation additional drilling refer note 19 beginning page fs47 additional discussion suspended wells fs17 equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 million possible maximum net amount could owed chevron estimated 150 million timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2007 approximately 27 billion consolidated companies included expenditures approximately 900 million environmental capital expenditures 18 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2008 total worldwide environmental capital expenditures estimated 19 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material fs18 besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation crude oil natural gas reserves sec rules require “ geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” beginning page fs66 changes estimates three years ending december 31 2007 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs74 estimates provedreserve values three years ending december 31 2007 based yearend prices time note 1 consolidated financial statements beginning page fs32 includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment properties plant equipment investments affiliates” beginning page fs20 includes reference conditions downward revisions provedreserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs32 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 20 beginning page fs48 includes information funded status company’s pension opeb plans end 2007 2006 components pension opeb expense three years ending december 31 2007 underlying assumptions periods pension opeb expense recorded consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments yearend 2007 2006 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet funded status overfunded pension plans recorded longterm asset “deferred charges assets” funded status underfunded unfunded pension opeb plans recorded “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense recorded “accumulated comprehensive income” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies expected longterm rate return us pension plan assets account 67 percent company’s pension plan assets remained 78 percent since 2002 10 years ending december 31 2007 actual asset returns averaged 87 percent plan yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets measurement date used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2007 company selected 63 percent discount rate major us pension postretirement plans rate selected based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2007 discount rates end 2006 2005 58 percent 55 percent respectively increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2007 620 million indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2007 approximately 70 fs19 million 1 percent increase discount rate plan accounted 60 percent companywide pension obligation would reduced total pension plan expense 2007 approximately 155 million increase discount rate would decrease pension obligation thus changing funded status plan recorded consolidated balance sheet total pension liability consolidated balance sheet december 31 2007 underfunded plans approximately 17 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 250 million would increased plan’s overfunded status approximately 160 million 410 million plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2007 company’s pension plan contributions 317 million including 78 million us plans 2008 company estimates contributions approximately 500 million actual contribution amounts dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2007 233 million total liability reflected underfunded status plans end 2007 29 billion indication discount rate sensitivity determination opeb expense 2007 1 percent increase discount rate company’s primary us opeb plan accounted 75 percent companywide opeb expense would decreased opeb expense approximately 20 million 025 percent increase discount rate plan accounted 87 percent companywide opeb liabilities would decreased total opeb liabilities end 2007 approximately 60 million main us postretirement medical plan annual increase company contributions limited 4 percent per year cap becomes effective year retirement premedicareeligible employees retiring january 1 2005 cap effective january 1 2005 premedicareeligible employees retiring date medicareeligible retirees active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 8 percent 2008 gradually drop 5 percent 2014 beyond indication health care costtrend rate sensitivity determination opeb expense 2007 1 percent increase rates main us opeb plan accounted 87 percent companywide opeb liabilities would increased opeb expense 8 million differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 20 beginning page fs48 information 33 billion beforetax actuarial losses recorded company december 31 2007 description method used amortize costs estimate costs recognized expense 2008 impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated provedreserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supply demand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions major individual impairments ppe recorded three years ending december 31 2007 estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fs20 fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values business combinations purchaseprice allocation accounting business combinations requires allocation company’s purchase price various assets liabilities acquired business respective fair values company uses available information make fair value determinations major acquisitions may hire independent appraisal firm assist making fair value estimates instances assumptions respect timing amount future revenues expenses associated asset might used determining fair value actual timing amount net cash flows revenues expenses related asset time may differ materially initial estimates timing delayed significantly net cash flows decline significantly asset could become impaired goodwill resulting business combination subject amortization required fasb statement 142 goodwill intangible assets company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 15 beginning page fs43 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2007 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards fasb statement 157 fair value measurements fas 157 september 2006 fasb issued fas 157 became effective company january 1 2008 standard defines fair value establishes framework measuring fair value expands disclosures fair value measurements fas 157 require new fair value measurements applies assets liabilities required recorded fair value accounting standards implementation fas 157 material effect company’s results operations consolidated financial position fasb staff position fas 1571 application fasb statement 157 fasb statement 13 related interpretive accounting pronouncements address leasing transactions fsp 1571 february 2008 fasb issued fsp 1571 became effective company january 1 2008 fsp excludes fasb statement 13 accounting leases related interpretive accounting pronouncements provisions fas 157 implementation standard material effect company’s results operations consolidated financial position fasb staff position fas 1572 effective date fasb statement 157 fsp 1572 february 2008 fasb issued fsp 1572 delays company’s january 1 2008 effective date fas 157 nonfinancial assets nonfinancial fs21 liabilities except recognized disclosed fair value financial statements recurring basis least annually january 1 2009 implementation standard material effect company’s results operations consolidated financial position fasb statement 159 fair value option financial assets financial liabilities including amendment fasb statement 115 fas 159 february 2007 fasb issued fas 159 became effective company january 1 2008 standard permits companies choose measure many financial instruments certain items fair value report unrealized gains losses earnings accounting optional generally applied instrument implementation fas 159 material effect company’s results operations consolidated financial position fasb statement 141 revised 2007 business combinations fas 141r december 2007 fasb issued fas 141r become effective business combination transactions acquisition date january 1 2009 standard requires acquiring entity business combination recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured respective fair values statement requires acquisitionrelated costs well restructuring costs acquirer expects incur obligated acquisition date recorded income rather included purchaseprice determination also requires recognition contingent arrangements acquisitiondate fair values subsequent changes fair value generally reflected income fasb statement 160 noncontrolling interests consolidated financial statements amendment arb 51 fas 160 fasb issued fas 160 december 2007 become effective company january 1 2009 retroactive adoption statement’s presentation disclosure requirements existing minority interests standard require ownership interests subsidiaries held parties parent presented within equity section consolidated statement financial position separate parent’s equity also require amount consolidated net income attributable parent noncontrolling interest clearly identified presented face consolidated income statement certain changes parent’s ownership interest accounted equity transactions subsidiary deconsolidated noncontrolling equity investment former subsidiary initially measured fair value company anticipate implementation fas 160 significantly change presentation consolidated income statement consolidated balance sheet fs22 page intentionally left blank fs23 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx february 22 2008 stockholders record numbered approximately 214000 restrictions company’s ability pay dividends fs24 management’s responsibility financial statements stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2007 effectiveness company’s internal control financial reporting december 31 2007 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein david j o’reilly stephen j crowe mark humphrey chairman board vice president vice president chief executive officer chief financial officer comptroller february 28 fs25 report independent registered public accounting firm stockholders board directors chevron corporation opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income shareholders’ equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 2007 december 31 2006 results operations cash flows three years period ended december 31 2007 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2007 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal controls financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatements whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 13 consolidated financial statements company changed method accounting buysell contracts april 1 2006 discussed note 15 consolidated financial statements company changed method accounting uncertain income tax positions january 1 2007 discussed note 20 consolidated financial statements company changed method accounting defined benefit pension postretirement plans december 31 2006 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp san francisco california february 28 2008 fs26 consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs27 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs28 consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs29 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs30 consolidated statement stockholders’ equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs31 note 1 summary significant accounting policies general exploration production upstream operations consist exploring developing producing crude oil natural gas marketing natural gas refining marketing transportation downstream operations relate refining crude oil finished petroleum products marketing crude oil many products derived petroleum transporting crude oil natural gas petroleum products pipeline marine vessel motor equipment rail car chemical operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lubricant oil additives company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value subsequent recoveries carrying value investments reported “other comprehensive income” differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference company’s share affiliate’s reported earnings adjusted quarterly appropriate reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity commodity derivative instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income derivative instruments relating foreign currency exposures gains losses reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost fs32 properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page fs47 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate refining marketing transportation chemical areas impairment reviews generally done basis refinery plant marketing area marketing assets country impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value required financial accounting standards board fasb statement 143 accounting asset retirement obligations fas 143 fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 23 beginning page fs57 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses mining assets determined using unitofproduction method proven reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization required fasb statement 142 goodwill intangible assets company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas mineral producing properties fs33 liability asset retirement obligation made following fas 143 refer note 23 beginning page fs57 discussion fas 143 federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized basis company’s net working interest entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs27 refer note 13 page fs42 discussion accounting buysell arrangements stock options sharebased compensation effective july 1 2005 company adopted provisions fasb statement 123r sharebased payment fas 123r sharebased compensation plans company previously accounted plans recognition measurement principles accounting principles board apb opinion 25 accounting stock issued employees apb 25 related interpretations disclosure requirements established fasb statement 123 accounting stockbased compensation fas 123 refer note 21 beginning page fs53 description company’s sharebased compensation plans information related awards granted plans additional information company’s adoption fas 123r following table illustrates effect net income earnings per share company applied fairvalue recognition provisions fas 123r stock options stock appreciation rights performance units restricted stock units full year 2005 fair value determined using blackscholes optionpricing model note 2 acquisition unocal corporation august 2005 company acquired unocal corporation unocal independent oil gas exploration production company aggregate purchase price unocal 17288 final purchaseprice allocation assets liabilities acquired completed june 30 2006 following unaudited pro forma summary presents results operations acquisition unocal occurred beginning 2005 pro forma summary used estimates assumptions based information available time management believes estimates assumptions reasonable however actual results may differed significantly pro forma financial information fs34 note 3 information relating consolidated statement cash flows consolidated statement cash flows include noncash financing investing activities refer note 23 starting page fs57 discussion revisions company’s asset retirement obligations involve cash receipts payments 2007 accordance cashflow classification requirements fas 123r sharebased payment “net decrease increase operating working capital” includes reductions 96 94 excess income tax benefits associated stock options exercised 2007 2006 respectively amounts offset “net purchases treasury shares” 2007 “net purchases shortterm investments” consist 799 restricted cash associated capitalinvestment projects company’s pascagoula mississippi refinery angola liquefied natural gas project invested shortterm marketable securities reclassified cash equivalents longterm deferred asset consolidated balance sheet december 2007 company issued 650 tax exempt mississippi gulf opportunity zone bond source funds pascagoula refinery project “net purchases treasury shares” represents cost common shares acquired open market less cost shares issued sharebased compensation plans openmarket purchases totaled 7036 5033 3029 2007 2006 2005 respectively major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented management’s discussion analysis beginning page fs2 presented following table net noncash additions 3560 2007 440 2006 435 2005 note 4 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum natural gas liquids excluding regulated pipeline operations chevron cusa also holds chevron’s investment chevron phillips chemical company llc cpchem joint venture accounted using equity method 2007 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa summarized financial information cusa consolidated subsidiaries presented table following page gives retroactive effect reorganizations occurred january 1 2005 however financial information following page may reflect financial position operating results periods presented reorganization actually occurred date fs35 note 5 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented following table restrictions ctc’s ability pay dividends make loans advances december 31 2007 note 6 stockholders’ equity retained earnings december 31 2007 2006 included approximately 7284 5580 respectively company’s share undistributed earnings equity affiliates december 31 2007 120 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron corporation longterm incentive plan ltip addition approximately 454000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan nonemployee directors’ plan note 7 financial derivative instruments financial derivative instruments discussed material change market risk occurred relative information presented 2006 commodity derivative instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes company uses international swaps derivatives association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net markedtomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fs36 fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” interest rates company enters interest rate swaps part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges fair values interest rate swaps reported consolidated balance sheet “accounts notes receivable” “accounts payable” fair value fair values derived quoted market prices independent thirdparty quotes available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 2132 5131 estimated fair values 2325 5621 december 31 2007 2006 respectively company holds cash equivalents marketable securities us nonus portfolios eurodollar bonds floatingrate notes time deposits commercial paper primary instruments held cash equivalents marketable securities carryingfair values 5427 9200 december 31 2007 2006 respectively balances 4695 8247 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately one year december 31 2007 restricted cash carryingfair value 799 related capitalinvestment projects company’s pascagoula mississippi refinery angola liquefied natural gas project reclassified cash equivalents longterm deferred asset consolidated balance sheet restricted cash invested shortterm marketable securities fair values financial derivative instruments end 2007 2006 material concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers note 8 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates purpose investments grouped follows upstream exploration production downstream refining marketing transportation chemicals first three groupings represent company’s “reportable segments” “operating segments” defined financial accounting standards board fasb statement 131 disclosures segments enterprise related information fas 131 segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined fas 131 codm company’s executive committee senior officers includes chief executive officer turn reports board directors chevron corporation operating segments represent components company described fas 131 terms engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assess performance c discrete financial information available segment managers reportable segments accountable directly maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members executive committee also individual management responsibilities participate committees purposes acting codm “all other” activities include company’s interest dynegy may 2007 chevron sold interest mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies fs37 company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” aftertax segment income major operating area presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2007 2006 follows “all other” assets consist primarily worldwide cash equivalents marketable securities real estate information systems company’s investment dynegy prior disposition 2007 mining operations power generation businesses technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2007 2006 2005 presented following table products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products revenues chemicals segment derived primarily manufacture sale additives lubricants fuel “all other” activities include revenues mining operations coal minerals power generation businesses insurance operations real estate activities technology companies united states single country accounted 10 percent company’s total sales operating revenues 2007 fs38 includes buysell contracts 6725 2006 23822 2005 substantially amounts period relate downstream segment refer note 13 page fs42 discussion company’s accounting buysell contracts segment income taxes segment income tax expense years 2007 2006 2005 follows segment information additional information segmentation major equity affiliates contained note 11 beginning page fs40 information related properties plant equipment segment contained note 12 page fs42 note 9 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations office buildings facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows 2006 conformed 2007 presentation rental expenses incurred operating leases 2007 2006 2005 follows fs39 contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2007 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 10 restructuring reorganization costs 2007 company implemented restructuring reorganization program downstream operations approximately 1000 employees eligible severance payments associated positions located outside united states majority terminations expected occur 2008 program expected complete end 2009 shown table activity company’s liability related downstream reorganization associated charges income categorized “operating expenses” “selling general administrative expenses” consolidated statement income note 11 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period december 31 2007 company’s carrying value investment tco 210 higher amount underlying equity tco net assets hamaca chevron’s 30 percent interest hamaca heavy oil production upgrading project located venezuela’s orinoco belt converted 30 percent shareholding joint stock company january 2008 25year contract term fs40 petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2007 company’s carrying value investment petroboscan approximately 310 higher amount underlying equity petroboscan net assets angola lng ltd chevron 36 percent interest angola lng process liquefy natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex joint venture gs holdings joint venture originally formed 1967 lg group caltex imports refines markets petroleum products petrochemicals predominantly south korea caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium cpc provides critical export route crude oil tco karachaganak december 31 2007 company’s carrying value investment cpc 50 higher amount underlying equity cpc net assets star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company limited sprc owns star refinery thailand petroleum authority thailand owns remaining 36 percent sprc escravos gastoliquids chevron nigeria limited cnl 75 percent interest escravos gastoliquids egtl 25 percent joint venture owned nigeria national petroleum company sasol ltd provides 50 percent venture capital required cnl riskbased financing returns based project performance venture formed convert natural gas produced chevron’s nigerian operations liquid products sale international markets december 31 2007 company’s carrying value investment egtl 25 lower amount underlying equity egtl net assets caltex australia ltd chevron 50 percent equity ownership interest caltex australia limited cal remaining 50 percent cal publicly owned december 31 2007 fair value chevron’s share cal common stock approximately 2294 aggregate carrying value company’s investment cal approximately 50 lower amount underlying equity cal net assets colonial pipeline company chevron owns approximate 23 percent equity interest colonial pipeline company colonial pipeline system runs texas new jersey transports petroleum products 13state market december 31 2007 company’s carrying value investment colonial pipeline approximately 580 higher amount underlying equity colonial pipeline net assets chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc cpchem half owned conocophillips corporation december 31 2007 company’s carrying value investment cpchem approximately 60 lower amount underlying equity cpchem net assets dynegy inc may 2007 chevron sold 19 percent common stock investment dynegy inc provider electricity markets customers throughout united states approximately 940 resulting gain 680 information “sales operating revenues” consolidated statement income includes 11555 9582 8824 affiliated companies 2007 2006 2005 respectively “purchased crude oil products” includes 5464 4222 3219 affiliated companies 2007 2006 2005 respectively “accounts notes receivable” consolidated balance sheet includes 1722 1297 due affiliated companies december 31 2007 2006 respectively “accounts payable” includes 374 262 due affiliated companies december 31 2007 2006 respectively fs41 following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 4124 december 31 2007 note 12 properties plant equipment note 13 accounting buysell contracts company adopted accounting prescribed emerging issues task force eitf issue 0413 accounting purchases sales inventory counterparty issue 0413 prospective basis april 1 2006 issue 0413 requires two legally separate exchange transactions counterparty including buysell transactions combined considered single arrangement purposes applying provisions accounting principles board opinion 29 accounting nonmonetary transactions entered “in contemplation” one another prior periods company accounted buysell transactions consolidated statement income monetary transaction purchases reported “purchased crude oil products” sales reported “sales operating revenues” company’s adoption issue 0413 buysell transactions beginning second quarter 2006 netted consolidated statement income effect net income amounts associated buysell transactions periods prior second quarter 2006 shown footnote consolidated statement income page fs27 fs42 note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive company party 88 lawsuits claims majority involve numerous petroleum marketers refiners related use mtbe certain oxygenated gasolines alleged seepages mtbe groundwater chevron agreed principle tentative settlement 60 pending lawsuits claims terms agreement must approved number parties including court confidential material company’s results operations liquidity financial position resolution remaining lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future tentative settlement referenced 60 lawsuits set precedents related standards liability used judge merits claims corrective measures required monetary damages assessed remaining lawsuits claims future lawsuits claims result company’s ultimate exposure related pending lawsuits claims currently determinable could material net income one period company longer uses mtbe manufacture gasoline united states rfg patent fourteen purported class actions brought consumers reformulated gasoline rfg alleging unocal misled california air resources board adopting standards composition rfg overlapped unocal’s undisclosed pending patents eleven lawsuits consolidated us district court central district california class action certified three consolidated state court action unocal alleged monopolized conspired engaged unfair methods competition resulting injury consumers rfg plaintiffs consolidated actions seek unspecified actual punitive damages attorneys’ fees interest behalf alleged class consumers purchased “summertime” rfg california january 1995 august 2005 parties reached tentative agreement resolve matters amount material company’s results operations liquidity financial position terms agreement confidential subject negotiation approval including courts note 15 taxes income taxes 2007 beforetax income us operations including related corporate charges 7794 compared beforetax income 9131 6733 2006 2005 respectively international operations beforetax income 24373 22845 18464 2007 2006 2005 respectively us federal income tax expense reduced 132 116 289 2007 2006 2005 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate explained table company’s effective tax rate decreased 45 percent 2007 prior year 2 percent decrease pertaining “effect income taxes international fs43 operations ” primarily due impact asset sales lower effective tax rates certain nonus operations 1 percent decrease “other” primarily relates effects asset sales 2007 company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following 2007 deferred tax liabilities increased approximately 1000 amount reported 2006 increase primarily related increased temporary differences properties plant equipment deferred tax assets increased approximately 1900 2007 increase related primarily additional foreign tax credits arising earnings hightaxrate international jurisdictions increase substantially offset valuation allowances overall valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences benefit expected realized tax loss carryforwards exist many international jurisdictions whereas tax loss carryforwards expiration date others expire various times 2008 2029 foreign tax credit carryforwards 3138 expire 2008 2017 december 31 2007 2006 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 20557 december 31 2007 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings intended reinvested indefinitely end 2007 deferred income taxes recorded undistributed earnings certain international operations company longer intends indefinitely reinvest earnings company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions effective january 1 2007 company implemented financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 clarifies accounting income tax benefits uncertain nature interpretation intended standardsetters address diversity practice existed area accounting income taxes fin 48 company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” fin 48 refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods accounting interpretation also provides guidance measurement methodology derecognition thresholds financial statement classification disclosures recognition interest penalties accounting cumulativeeffect adjustment date adoption upon adoption fin 48 january 1 2007 company recorded cumulativeeffect adjustment reduced retained earnings 35 fs44 following table indicates changes company’s unrecognized tax benefits year ended december 31 2007 term “unrecognized tax benefits” fin 48 refers differences tax position taken expected taken tax return benefit measured recognized financial statements accordance guidelines fin 48 interest penalties included individually significant change 2007 reduction unrecognized tax benefit position previously expected taken subsequently taken 2006 tax return although unrecognized tax benefits individual tax positions may increase decrease 2008 company believes change individually significant 2008 approximately 80 percent 2199 unrecognized tax benefits december 31 2007 would impact overall tax rate subsequently recognized tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2007 regard company received final us federal income tax audit report years 2002 2003 march 2007 early 2008 company’s 2004 2005 tax returns examination internal revenue service major tax jurisdictions latest years income tax examinations finalized follows nigeria 1994 angola 2001 saudi arabia 2003 consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2007 accruals 198 anticipated interest penalty obligations included consolidated balance sheet year 2007 income tax expense associated interest penalties material taxes income note 16 shortterm debt weightedaverage interest rates december 31 2007 2006 435 percent 525 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 7 beginning page fs36 information concerning company’s debtrelated derivative activities december 31 2007 company 4950 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based fs45 london interbank offered rate bank prime rate amounts outstanding credit agreements 2007 yearend december 31 2007 2006 company classified 4382 4450 respectively shortterm debt longterm settlement obligations expected require use working capital 2008 company intent ability refinance debt longterm basis note 17 longterm debt total longterm debt excluding capital leases december 31 2007 5664 company’s longterm debt outstanding yearend 2007 2006 follows longterm debt 2132 matures follows 2008 850 2009 431 2010 65 2011 48 2012 33 2012 705 2007 2000 chevron canada funding company bonds matured company also redeemed early 874 texaco capital inc bonds aftertax loss approximately 175 2006 510 bonds retired maturity 1700 unocal debt redeemed early 92 beforetax gain note 18 new accounting standards fasb statement 157 fair value measurements fas 157 september 2006 fasb issued fas 157 became effective company january 1 2008 standard defines fair value establishes framework measuring fair value expands disclosures fair value measurements fas 157 require new fair value measurements applies assets liabilities required recorded fair value accounting standards implementation fas 157 material effect company’s results operations consolidated financial position fasb staff position fas 1571 application fasb statement 157 fasb statement 13 related interpretive accounting pronouncements address leasing transactions fsp 1571 february 2008 fasb issued fsp 1571 became effective company january 1 2008 fsp excludes fasb statement 13 accounting leases related interpretive accounting pronouncements provisions fas 157 implementation standard material effect company’s results operations consolidated financial position fasb staff position fas 1572 effective date fasb statement 157 fsp 1572 february 2008 fasb issued fsp 1572 delays company’s january 1 2008 effective date fas 157 nonfinancial assets nonfinancial liabilities except recognized disclosed fair value financial statements recurring basis least annually january 1 2009 implementation standard material effect company’s results operations consolidated financial position fasb statement 159 fair value option financial assets financial liabilities including amendment fasb statement 115 fas 159 february 2007 fasb issued fas 159 became effective company january 1 2008 standard permits companies choose measure many financial instruments certain items fair value report unrealized gains losses earnings accounting optional generally applied instrument implementation fas 159 material effect company’s results operations consolidated financial position fasb statement 141 revised 2007 business combinations fas 141r december 2007 fasb issued fas 141r become effective business combination transactions acquisition date january 1 2009 standard requires acquiring entity business combination fs46 recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured respective fair values statement requires acquisitionrelated costs well restructuring costs acquirer expects incur obligated acquisition date recorded income rather included purchaseprice determination also requires recognition contingent arrangements acquisitiondate fair values subsequent changes fair value generally reflected income fasb statement 160 noncontrolling interests consolidated financial statements amendment arb 51 fas 160 fasb issued fas 160 december 2007 become effective company january 1 2009 retroactive adoption statement’s presentation disclosure requirements existing minority interests standard require ownership interests subsidiaries held parties parent presented within equity section consolidated statement financial position separate parent’s equity also require amount consolidated net income attributable parent noncontrolling interest clearly identified presented face consolidated income statement certain changes parent’s ownership interest accounted equity transactions subsidiary deconsolidated noncontrolling equity investment former subsidiary initially measured fair value company anticipate implementation fas 160 significantly change presentation consolidated income statement consolidated balance sheet note 19 accounting suspended exploratory wells company accounts cost exploratory wells accordance fasb statement 19 financial reporting oil gas producing companies fas 19 amended fasb staff position fsp fas 191 accounting suspended well costs provides exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b enterprise making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fas 19 provides number indicators assist entity demonstrate sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2007 capitalized exploratory well costs charged expense upon 2005 adoption fsp fas 191 represent property sales exchanges following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling aging former unocal wells based date drilling completed rather date chevron’s acquisition unocal 2005 certain projects multiple wells fields 1211 exploratory well costs capitalized one year december 31 2007 750 32 projects related projects drilling activities way firmly planned near future additional 8 three projects related projects drilling activity 2007 453 balance related 19 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 453 referenced following activities associated assessing reserves fs47 projects’ economic viability 99 one project combined two projects single development project submitted plans government 2007 b 74 three projects continued unitization efforts adjacent discoveries span international boundaries c 74 one project finalizing field development evaluation 74 one project field rework continues accommodate larger design capacity finalize sales agreements e 42 one project finalizing development concept f 90 miscellaneous activities 12 projects smaller amounts suspended progress made 54 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 1211 suspended well costs capitalized period greater one year december 31 2007 represents 127 exploratory wells 54 projects tables contain aging costs well project basis note 20 employee benefit plans company definedbenefit pension plans many employees company typically prefunds definedbenefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives provisions pension protection act 2006 ppa became effective company 2008 provisions change among things methodology determining interest rate used calculating lumpsum benefits change methodology increased lumpsum interest rate lowered company’s pension benefit obligations 300 december 31 2007 effect interest rate change pension plan contributions 2008 expected de minimis company’s funded pension plans considered “wellfunded” ppa provisions company also sponsors postretirement plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent per year certain life insurance benefits paid company effective december 31 2006 company implemented recognition measurement provisions financial accounting standards board statement 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132rfas 158 requires recognition overfunded underfunded status defined benefit pension postretirement benefit plans asset liability offset “accumulated comprehensive loss” fs48 company uses measurement date december 31 value benefit plan assets obligations funded status company’s pension postretirement benefit plans 2007 2006 follows amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2007 2006 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension postretirement plans 2990 4065 end 2007 2006 amounts consisted accumulated benefit obligations us international pension plans 7712 4000 respectively december 31 2007 7987 3669 respectively december 31 2006 information us international pension plans accumulated benefit obligation excess plan assets december 31 2007 2006 fs49 components net periodic benefit cost 2007 2006 2005 amounts recognized comprehensive income 2007 shown table 2007 changes pension plan assets benefit obligations recognized changes comprehensive income net actuarial losses recorded “accumulated comprehensive loss” december 31 2007 company’s us pension international pension postretirement benefit plans amortized straightline basis approximately 10 13 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2008 company estimates actuarial losses 59 80 39 amortized “accumulated comprehensive loss” us pension international pension postretirement benefit plans respectively addition company estimates additional 78 recognized “accumulated comprehensive loss” 2008 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2007 approximately nine 11 years us international pension plans respectively six years postretirement benefit plans 2008 company estimates prior service credits costs 7 25 81 amortized “accumulated comprehensive loss” us pension international pension postretirement benefit plans respectively fs50 assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rate return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 67 percent company’s pension plan assets december 31 2007 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets measurement date used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2007 company selected 63 percent discount rate major us pension postretirement plans rate based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2007 discount rates end 2006 2005 58 percent 55 percent respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2007 main us postretirement medical plan assumed health care costtrend rates start 8 percent 2008 gradually decline 5 percent 2014 beyond measurement december 31 2006 assumed health care costtrend rates started 9 percent 2007 gradually declined 5 percent 2011 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy company’s pension plan weightedaverage asset allocations december 31 asset category follows pension plans invest primarily asset categories sufficient size liquidity cost efficiency permit investments reasonable size pension plans invest asset categories provide diversification benefits easily measured assess fs51 plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors approved following percentage assetallocation ranges equities 4070 fixed incomecash 2060 real estate 015 05 significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset category risk equities include investments company’s common stock amount 36 17 december 31 2007 2006 respectively “other” asset category includes minimal investments privateequity limited partnerships cash contributions benefit payments 2007 company contributed 78 239 us international pension plans respectively 2008 company expects contributions approximately 300 200 us international pension plans respectively actual contribution amounts dependent upon planinvestment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 207 2008 compared 150 paid 2007 following benefit payments include estimated future service expected paid next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop follows total company matching contributions employee accounts within esip 206 169 145 2007 2006 2005 respectively cost reduced value shares released lesop totaling 33 6 4 2007 2006 2005 respectively remaining amounts totaling 173 163 141 2007 2006 2005 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted american institute certified public accountants aicpa statement position 936 employers’ accounting employee stock ownership plans company elected continue practices based aicpa statement position 763 accounting practices certain employee stock ownership plans subsequent consensus eitf fasb debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total credits expenses recorded lesop 1 94 2007 2006 2005 respectively including 16 17 18 interest expense related lesop debt credit charge compensation expense 17 18 76 dividends paid lesop shares 8 59 55 used 2007 2006 2005 respectively service lesop debt amount 2006 included 28 lesop debt service scheduled payment first business day january 2007 paid late december 2006 addition company made contributions 2005 98 satisfy lesop debt service excess dividends received lesop contributions required 2007 2006 dividends received lesop sufficient satisfy lesop debt service shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total current year remaining debt service lesop shares december 31 2007 2006 follows fs52 benefit plan trusts texaco established benefit plan trust funding obligations benefit plans yearend 2007 trust contained 142 million shares chevron treasury stock company intends continue pay obligations benefit plans trust sell shares use dividends shares pay benefits extent company pay benefits trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2007 2006 trust assets 69 98 respectively invested primarily interestearning accounts employee incentive plans chevron two incentive plans management incentive plan mip longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility mip annual cash incentive plan links awards performance results prior year cash awards may deferred recipients conversion stock units investment fund alternatives aggregate charges expense mip 184 180 155 2007 2006 2005 respectively awards ltip consist stock options sharebased compensation described note 21 2007 company program provided eligible employees covered mip ltip annual cash bonus company achieves certain financial safety goals charges program 431 329 324 2007 2006 2005 respectively effective 2008 program modified mirror design mip combined single plan named chevron incentive plan cip note 21 stock options sharebased compensation effective july 1 2005 company adopted provisions financial accounting standards board statement 123r sharebased payment fas 123r sharebased compensation plans company previously accounted plans recognition measurement principles accounting principles board opinion 25 accounting stock issued employees related interpretations disclosure requirements established fasb statement 123 accounting stockbased compensation company adopted fas 123r using modified prospective method accordingly results prior periods restated refer note 1 beginning page fs32 pro forma effect net income earnings per share company applied fairvalue recognition provisions fas 123r full year 2005 2007 2006 2005 compensation expense stock options 146 95 tax 125 81 tax 65 42 tax respectively addition compensation expense stock appreciation rights performance units restricted stock units 205 133 tax 113 73 tax 59 39 tax 2007 2006 2005 respectively significant stockbased compensation costs capitalized december 31 2007 2006 cash received payment option exercises sharebased payment arrangements 2007 2006 2005 445 444 297 respectively actual tax benefits realized tax deductions option exercises 94 91 71 2007 2006 2005 respectively cash paid settle performance units stock appreciation rights 88 68 110 2007 2006 2005 respectively cash paid 2005 included 73 unocal awards paid changeincontrol plan provisions company presents tax benefits deductions exercise stock options financing cash inflows consolidated statement cash flows 2006 company implemented transition method fasb staff position fas 123r3 transition election related accounting tax effects sharebased payment awards calculating beginning balance pool excess tax benefits related employee compensation determining subsequent impact pool employee awards fully vested outstanding upon adoption fas 123r company’s reported tax expense period subsequent implementation fas 123r affected election refer note 3 page fs35 information excess tax benefits reported company’s statement cash flows chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient stock options stock appreciation rights granted ltip extend 10 years grant date effective options granted june 2002 onethird award vests first second third anniversaries date grant prior change options vested one year date grant fs53 performance units granted ltip settle cash end threeyear performance period settlement amounts based achievement performance targets relative major competitors period payments indexed company’s stock price texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options 10year contractual lives extending 2011 retained provision restored provision enables participant exercises stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted beginning 2007 restored options granted ltip awards may granted former texaco plans unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans awards issued prior 2004 generally may exercised three years termination employment depending upon terms individual award agreements original expiration date whichever earlier awards issued since 2004 generally remained exercisable end normal option term termination employment occurred prior august 10 2007 awards issued unocal plans including restricted stock units restricted stock units performance shares became vested acquisition date shares cash issued recipients accordance changeincontrol provisions plans fair market values stock options stock appreciation rights granted 2007 2006 2005 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term represent options converted acquisition date summary option activity 2007 presented total intrinsic value ie difference exercise price market price options exercised 2007 2006 2005 423 281 258 respectively upon adoption fas 123r company elected amortize newly issued graded awards straightline basis requisite service period accordance fas 123r implementation guidance issued staff securities exchange commission company accelerates vesting fs54 period retirementeligible employees accordance vesting provisions company’s sharebased compensation programs awards issued adoption fas 123r december 31 2007 160 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period two years january 1 2007 number ltip performance units outstanding equivalent 2110196 shares 2007 931200 units granted 784364 units vested cash proceeds distributed recipients 32017 units forfeited december 31 2007 units outstanding 2225015 fair value liability recorded instruments 205 addition outstanding stock appreciation rights awards granted various ltip former texaco unocal programs totaled approximately 1 million equivalent shares december 31 2007 liability 38 recorded awards broadbased employee stock options addition plans described chevron granted eligible employees stock options equivalents 1998 options vested february 2000 expired february 2008 total 9641600 options awarded exercise price 3816 per share fair value option date grant estimated 954 using blackscholes model preceding 10 years assumptions used model based 10year average riskfree interest rate 7 percent dividend yield 42 percent expected life seven years volatility 247 percent january 1 2007 number broadbased employee stock options outstanding 1306059 2007 exercises 637044 shares forfeitures 16300 shares reduced outstanding options 652715 december 31 2007 instruments aggregate intrinsic value 36 remaining contractual term options 01 year total intrinsic value options exercised 2007 2006 2005 30 10 9 respectively note 22 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs43 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity guarantees company’s guarantee approximately 600 associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduce time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron carries liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 end 2007 company paid 48 indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims must asserted later february 2009 equilon indemnities later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments company recorded liabilities possible claims indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 indemnification agreement company’s liability unlimited april 2022 indemnification expires acquirer shares certain environmental remediation costs maximum obligation 200 reached december 31 2007 fs55 securitization 2007 company completed sale us proprietary consumer credit card business related receivables transaction included terminating qualifying special purpose entity spe used securitize associated retail accounts receivable use another qualifying spe company 675 securitized trade accounts receivable related downstream business december 31 2007 arrangement effect accelerating chevron’s collection securitized amounts chevron’s total estimated financial exposure securitization december 31 2007 65 event spe experiences major defaults collection receivables chevron believes would additional loss exposure connected thirdparty investments securitization longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2008 4700 2009 3300 2010 3300 2011 1900 2012 1300 2013 4900 portion commitments may ultimately shared project partners total payments agreements approximately 3700 2007 3000 2006 2100 2005 minority interests company commitments 204 related minority interests subsidiary companies environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2007 1539 included balance remediation activities 240 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2007 123 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2007 environmental reserves balance 1416 864 related approximately 2000 sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 552 associated various sites international downstream 146 upstream 267 chemicals 105 34 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2007 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude fs56 possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 23 discussion company’s asset retirement obligations equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 possible maximum net amount could owed chevron estimated 150 timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 23 asset retirement obligations company accounts asset retirement obligations aro accordance financial accounting standards board statement fasb 143 accounting asset retirement obligations fas 143 accounting standard applies fair value liability aro recorded legal obligation associated retirement tangible longlived asset liability reasonably estimated obligations associated retirement assets require recognition certain circumstances 1 present value liability offsetting asset aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates 2005 fasb issued fasb interpretation 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 effective company december 31 2005 fin 47 clarifies phrase “conditional asset retirement obligation” used fas 143 refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control company obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement uncertainty timing andor method settlement conditional aro factored measurement liability sufficient information exists fas 143 acknowledges cases sufficient information may available reasonably estimate fair value aro fin 47 also clarifies entity would sufficient information reasonably estimate fair value aro adopting fin 47 company recognize additional liabilities conditional aros due inability reasonably estimate fair value obligations indeterminate settlement dates fas 143 fin 47 primarily affect company’s accounting crude oil natural gas producing assets significant aros associated legal obligations retire refining marketing transportation downstream chemical longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2007 2006 2005 includes 175 revision aro liability retained properties sold table amounts 2007 2006 associated “revisions estimated cash flows” reflect increasing costs abandon onshore offshore wells equipment facilities fs57 including 1128 2006 estimated costs dismantle abandon wells facilities damaged 2005 hurricanes gulf mexico longterm portion 8253 balance end 2007 7555 note 24 financial information net income 2007 included gains approximately 2000 relating sale nonstrategic properties amount approximately 1100 related downstream assets 680 related sale company’s investment dynegy inc financial information follows includes 18 15 2 2007 2006 2005 respectively company’s share equity affiliates’ foreign currency effects excess replacement cost carrying value inventories lastin firstout lifo method used 6958 6010 december 31 2007 2006 respectively replacement cost generally based average acquisition costs year lifo profits 113 82 34 included net income years 2007 2006 2005 respectively note 25 earnings per share basic earnings per share eps based upon net income less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 21 “stock options sharebased compensation” beginning page fs53 table sets forth computation basic diluted eps fs58 page intentionally left blank fs59 fiveyear financial summary unaudited fs60 accordance statement fas 69 disclosures oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo asiapacific table costs incurred exploration property acquisitions development1 fs61 geographic area includes activities principally australia azerbaijan bangladesh china kazakhstan myanmar partitioned neutral zone kuwait saudi arabia philippines thailand international “other” geographic category includes activities argentina brazil canada colombia denmark netherlands norway trinidad tobago venezuela united kingdom countries amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies “other” amounts composed company’s equity interests venezuela angola russia refer note 11 beginning page fs40 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs62 fs63 company’s results operations oil gas producing activities years 2007 2006 2005 shown following table net income exploration production activities reported page fs38 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs38 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations includes 10 costs incurred prior assignment proved reserves 2007 represents accretion aro liability refer note 23 “asset retirement obligations” beginning page fs57 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs64 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 23 “asset retirement obligations” beginning page fs57 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs65 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly executive vice president responsible company’s worldwide exploration production activities rac members knowledgeable sec guidelines proved reserves classification rac coordinates activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities provide independent reviews business units’ recommended reserve changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves fs66 year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee executive committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination provedreserve records documentation alignment corporate reserves manual reserve quantities december 31 2007 oilequivalent reserves company’s consolidated operations 79 billion barrels refer term “reserves” page e24 definition oilequivalent reserves approximately 28 percent total reserves united states company’s interests equity affiliates oilequivalent reserves 29 billion barrels 84 percent associated company’s 50 percent ownership tco aside tco operations single property accounted 5 percent company’s total oilequivalent proved reserves fewer 20 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted 37 percent company’s proved reserves total properties geographically dispersed located united states south america west africa asiapacific region united states total oilequivalent reserves yearend 2007 22 billion barrels amount 41 percent 21 percent 38 percent located california gulf mexico us areas respectively california liquids reserves represented 94 percent total classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region liquids represented approximately 66 percent total oilequivalent reserves production operations mostly offshore result also capital intensive costs include investments wells production platforms facilities gathering lines storage facilities us areas reserves split equally liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection pattern net reserve changes shown following tables three years ending december 31 2007 necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved oil natural gas reserves changes thereto years 2005 2006 2007 shown tables pages fs68 fs70 fs67 net proved reserves crude oil condensate natural gas liquids information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevron significant interests proved oil sands reserves canada associated athabasca project internal management purposes chevron views reserves development integral part total upstream operations however sec regulations define reserves miningrelated part conventional oil gas reserves net proved oil sands reserves 436 million barrels december 31 2007 oil sands reserves considered standardized measure discounted future net cash flows conventional oil gas reserves found page fs73 noteworthy amounts categories liquids provedreserve changes 2005 2007 discussed revisions 2005 net revisions reduced reserves 239 million 24 million barrels worldwide consolidated companies equity affiliates respectively consolidated companies net decrease 199 million barrels international areas 40 million barrels united states largest downward net revisions internationally 108 million barrels indonesia 53 million barrels kazakhstan due primarily effect higher yearend prices calculation reserves associated productionsharing variableroyalty contracts united states 40 millionbarrel reduction across many fields geographic sections downward revision affiliated companies 19 millionbarrel reduction hamaca attributable revised government royalty provisions tco downward effect higher yearend prices partially offset increased reservoir performance fs68 2006 net revisions increased reserves 39 million 84 million barrels worldwide consolidated companies equity affiliates respectively international consolidated companies accounted net increase 39 million barrels largest upward net revisions 61 million barrels indonesia 27 million barrels thailand indonesia increase result infill drilling improved steamflood performance upward revision thailand reflected additional drilling development activity year upward revisions partially offset reductions reservoir performance nigeria united kingdom decreased reserves 43 million barrels 32 million barrels respectively upward revision affiliated companies related 60 millionbarrel increase tco result improved reservoir performance 2007 net revisions decreased reserves 146 million barrels worldwide consolidated companies increased reserves 103 million barrels equity affiliates consolidated companies largest downward net revisions 89 million barrels africa 66 million barrels indonesia africa decrease mainly based field performance data fields nigeria effect higher yearend prices angola republic congo indonesia decline also reflected impact higher yearend prices higher prices also resulted downward revisions karachaganak azerbaijan equity affiliates upward revision related 92 millionbarrel increase tengiz field tco 11 millionbarrel increase petroboscan venezuela result improved reservoir performance tco upward revision tempered negative impact higher yearend prices improved recovery 2005 improved recovery increased liquids volumes worldwide 203 million barrels consolidated companies international areas accounted 142 million barrels increase indonesia added 42 million barrels due improved performance reserve additions 67 million barrels africa occurred primarily angola resulted infill drilling wells workovers secondary recovery gas injection additions 29 million barrels “other” international area mainly attributable improved waterflood performance offshore eastern canada increase 61 million barrels occurred united states primarily california due improved performance large heavy oil field thermal recovery 2006 improved recovery increased liquids volumes worldwide 83 million barrels consolidated companies reserves united states increased 52 million barrels california representing 49 million barrels total increase due steamflood expansion revised modeling activities internationally improved recovery increased reserves 31 million barrels single country accounting increase 10 million barrels 2007 improved recovery increased liquids volumes 20 million barrels worldwide addition individually significant extensions discoveries 2005 extensions discoveries increased liquids volumes worldwide 184 million barrels consolidated companies largest increase 49 million barrels nigeria reflecting new development drilling including agbami field among others new field developments brazil contributed another 41 million barrels discoveries united states 44 millionbarrel addition associated mainly initial booking reserves blind faith field deepwater gulf mexico 2006 extensions discoveries increased liquids volumes worldwide 107 million barrels consolidated companies reserves nigeria increased 27 million barrels due part initial booking reserves aparo field additional drilling activities contributed 19 million barrels united kingdom 14 million barrels argentina united states gulf mexico added 25 million barrels mainly result initial booking great white field deepwater perdido fold belt area 2007 extensions discoveries increased liquids volumes 60 million barrels worldwide largest additions 25 million barrels us gulf mexico mainly deepwater tahiti mad dog fields purchases 2005 acquisition 572 million barrels liquids related solely acquisition unocal august threefourths 376 million barrels acquired international areas represented volumes azerbaijan thailand volumes acquired united states texas alaska 2006 acquisitions increased liquids volumes worldwide 21 million barrels consolidated companies 119 million barrels equity affiliates consolidated companies amount mainly result new agreements nigeria added 13 million barrels reserves otherequityaffiliates quantity reflects result conversion boscan ll652 operations joint stock companies venezuela 2007 acquisitions 316 million barrels equity affiliates related formation new hamaca equity affiliate venezuela sales 2005 sales 58 million barrels “other” international area related disposition former unocal operations onshore canada 2006 sales decreased reserves 15 million barrels due conversion ll652 risked service agreement joint stock company venezuela 2007 affiliated company sales 432 million barrels related dissolution hamaca equity affiliate venezuela fs69 net proved reserves natural gas noteworthy amounts categories natural gas provedreserve changes 2005 2007 discussed revisions 2005 reserves revised downward 14 billion cubic feet bcf consolidated companies 498 bcf equity affiliates consolidated companies negative revisions 428 bcf asiapacific region decrease attributable one field kazakhstan due mainly effects higher yearend prices variableroyalty provisions productionsharing contract reserves additions consolidated companies totaled 211 bcf 243 bcf africa “other” respectively majority african region changes angola due revised forecast fuel gas usage nigeria improved reservoir performance availability thirdparty compression colombia accounted increase “other” region revisions united states decreased reserves 9 bcf nominal increases san joaquin valley offset decreases gulf mexico “other” region tco affiliate kazakhstan reduction 547 bcf reflects updated forecast future royalties payable yearend price effects partially offset volumes added result updated assessment reservoir performance fs70 2006 revisions accounted net increase 481 bcf consolidated companies 26 bcf affiliates consolidated companies net increases 511 bcf internationally partially offset 30 bcf downward revision united states drilling development activities added 337 bcf reserves thailand kazakhstan added 200 bcf largely due development activity trinidad tobago increased 185 bcf attributable improved reservoir performance new contract sales natural gas additions partially offset downward revisions 224 bcf united kingdom 130 bcf australia due drilling results reservoir performance us “other” downward revision 102 bcf due reservoir performance partially offset upward revisions 72 bcf gulf mexico california related reservoir performance development drilling tco upward revision 26 bcf associated additional development activity updated reservoir performance 2007 revisions increased reserves consolidated companies net 395 bcf increased reserves affiliated companies net 73 bcf consolidated companies net increases 209 bcf united states 186 bcf internationally improved reservoir performance many fields united states contributed 130 bcf “other” region 40 bcf california 39 bcf gulf mexico drilling activities added 360 bcf thailand improved reservoir performance added 188 bcf trinidad tobago additions partially offset downward revisions 185 bcf australia due drilling results 136 bcf nigeria due field performance negative revisions due impact higher prices recorded azerbaijan kazakhstan tco upward revision 75 bcf associated improved reservoir performance development activities upward revision net negative impact due higher yearend prices extensions discoveries 2005 consolidated companies increased reserves 370 bcf including 167 bcf united states 118 bcf asiapacific region united states 99 bcf added “other” region 68 bcf gulf mexico primarily due drilling activities addition asiapacific resulted primarily increased drilling kazakhstan 2006 extensions discoveries accounted increase 799 bcf consolidated companies reflecting 531 bcf increase outside united states us increase 268 bcf bangladesh added 451 bcf result development activity field extensions thailand added 59 bcf result drilling activities us “other” contributed 157 bcf approximately half related south texas piceance basin gulf mexico added 111 bcf partly due initial booking reserves great white field deepwater perdido fold belt area 2007 extensions discoveries accounted increase 518 bcf worldwide largest addition 330 bcf bangladesh result drilling activities additions individually significant purchases 2005 except 7 bcf 5656 bcf total purchases associated unocal acquisition international reserve acquisitions 4488 bcf thailand accounting half volumes significant volumes added bangladesh myanmar 2006 purchases natural gas reserves 35 bcf consolidated companies evenly divided company’s united states international operations affiliated companies added 54 bcf reserves result conversion operating service agreement joint stock company venezuela 2007 purchases natural gas reserves 141 bcf consolidated companies included acquisition additional interest bibiyana field bangladesh affiliated company purchases 211 bcf related formation new hamaca equity affiliate venezuela initial booking related angola lng project sales 2005 sales 248 bcf “other” international region related disposition formerunocal’s onshore properties canada 2006 sales consolidated companies totaled 149 bcf mostly associated conversion risked service agreement joint stock company venezuela 2007 sales 76 bcf 175 bcf consolidated companies equity affiliates respectively affiliated company sales related dissolution hamaca equity affiliate venezuela fs71 standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs72 fs73 changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs74 exhibit index e1 filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 38 schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 16 consolidated financial statements beginning page fs45 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 26th day february 2009 chevron corporation david j o’reilly david j o’reilly chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 26th day february 2009 financial fs2 management’s discussion analysis financial condition results operations key financial results fs2 income major operating area fs2 business environment outlook fs2 operating developments fs5 results operations fs6 consolidated statement income fs8 selected operating data fs10 liquidity capital resources fs10 financial ratios fs12 guarantees offbalancesheet arrangements contractual obligations contingencies fs12 financial derivative instruments fs13 transactions related parties fs15 litigation contingencies fs15 environmental matters fs17 critical accounting estimates assumptions fs18 new accounting standards fs21 quarterly results stock market data fs24 fs25 consolidated financial statements report management fs25 report independent registered public accounting firm fs26 consolidated statement income fs27 consolidated statement comprehensive income fs28 consolidated balance sheet fs29 consolidated statement cash flows fs30 consolidated statement stockholders’ equity fs31 fs32 fs1 key financial results income major operating area refer “results operations” section beginning page fs6 discussion financial results major operating area three years ending december 31 2008 business environment outlook chevron global energy company significant business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark france india indonesia kazakhstan myanmar netherlands nigeria norway partitioned neutral zone saudi arabia kuwait philippines qatar republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend largely profitability upstream exploration production downstream refining marketing transportation business segments single biggest factor affects results operations segments movement price crude oil downstream business crude oil largest cost component refined products overall trend earnings typically less affected results company’s chemicals business activities invest ments earnings company period may also influenced events transactions infrequent unusual nature recent years 2008 chevron oil gas industry large experienced increase certain costs exceeded general trend inflation many areas world increase costs affected company’s operating expenses capital programs business segments particularly upstream cost pressures began soften somewhat late 2008 price crude oil dropped precipitously record high midyear demand goods services industry began slacken cost trend expected continue 2009 crudeoil prices significantly rebound refer “upstream” section next page discussion trend crudeoil prices company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries sustain longterm competitive position upstream business company must develop replenish inventory projects offer adequate financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments time certain governments sought renegotiate contracts impose additional costs company governments may attempt future company continue monitor developments take account evaluating future investment opportunities otherwise seek mitigate risks company’s current operations future prospects company also continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s growth refer “results operations” section beginning page fs6 discussions net gains asset sales 2008 asset dispositions restructurings may occur future periods could result significant gains losses fs2 company closely monitoring ongoing uncertainty financial credit markets rapid decline crudeoil prices began second half 2008 general contraction worldwide economic activity management taking developments account conduct daily operations business planning company remains confident underlying financial strength deal potential problems presented environment comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crudeoil naturalgas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments attempts manage risks operating facilities business price levels capital exploratory costs operating expenses associated efficient production crude oil natural gas also subject external factors beyond company’s control external factors include general level inflation also prices charged industry’s material serviceproviders affected volatility industry’s supply demand conditions materials services capital exploratory expenditures operating expenses also affected damages production facilities caused severe weather civil unrest industry price levels crude oil volatile 2008 spot price west texas intermediate wti crude oil benchmark crude started 2008 96 per barrel peaked 147 early july end year wti price fallen 45 per barrel midfebruary 2009 wti price 38 per barrel collapse price second half 2008 largely driven decline demand crude oil associated significant weakening world economies wti price averaged 100 per barrel fullyear 2008 compared 72 2007 wide differential prices existed 2008 highquality ie highgravity lowsulfur crude oils lower quality ie lowgravity highsulfur crude relatively lower price highsulfur crudes associated ample supply relatively lower demand due limited number refineries able process lowerquality feedstock light products ie motor gasoline jet fuel aviation gasoline diesel fuel chevron produces shares production heavy crude oil california chad indonesia partitioned neutral zone saudi arabia kuwait venezuela certain fields angola china united kingdom north sea refer page fs10 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets united states 2008 benchmark prices henry hub averaged 9 per thousand cubic feet mcf compared 7 2007 december 31 2008 midfebruary 2009 fs3 henry hub price 560 470 per mcf respectively fluctuations price natural gas united states closely associated volumes produced north america inventory underground storage relative customer demand us natural gas prices also typically higher winter period demand heating greatest certain regions world company operates different supply demand regulatory circumstances typically resulting lower average sales prices company’s production natural gas refer page fs10 company’s average natural gas realizations us international regions additionally excesssupply conditions exist certain parts world cannot easily serve mitigate relatively higherprice conditions united states markets lack infrastructure transport receive liquefied natural gas help address regional imbalance supply demand natural gas chevron continues invest longterm projects areas excess supply install infrastructure produce liquefy natural gas transport tanker along investments commitments regasify product markets demand strong supplies plentiful due significance overall investment longterm projects natural gas sales prices areas excess supply natural gas transferred processing facility expected remain sales prices natural gas produced much nearer areas high demand transported existing natural gas pipeline networks united states thailand besides impact fluctuation price crude oil natural gas longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax rates income cost goods services chevron’s worldwide net oilequivalent production 2008 including volumes produced oil sands averaged 253 million barrels per day decline 90000 barrels per day 2007 due mainly impact higher prices volumes recovered certain productionsharing variableroyalty agreements outside united states damage production facilities september 2008 caused hurricanes gustav ike us gulf mexico refer discussion us upstream production trends “results operations” section page fs6 refer also “selected operating data” table page fs10 listing production volumes three years ending december 31 2008 company estimates oilequivalent production 2009 average approximately 263 million barrels per day estimate subject many uncertainties including quotas may imposed opec price effects production volumes calculated costrecovery variableroyalty provisions certain contracts changes fiscal terms restrictions scope company operations delays project startups fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics disruptions operations future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production chevron’s upstream investment currently made outside united states investments upstream projects generally made well advance start associated production crude oil natural gas approximately 20 percent company’s net oilequivalent production 2008 occurred opecmember countries angola nigeria venezuela partitioned neutral zone saudi arabia kuwait production statistic excludes volumes produced indonesia relinquished opec membership end 2008 meeting december 17 2008 opec announced reduction 42 million barrels per day 14 percent actual september 2008 production 29 million barrels per day reduction became effective january 1 2009 opec quotas significantly affect chevron’s production level 2007 2008 company’s current future production levels could affected cutbacks announced opec december 2008 refer “results operations” section pages fs6 fs7 additional discussion company’s upstream operations downstream earnings downstream segment closely tied margins refining marketing products include gasoline diesel jet fuel lubricants fuel oil feedstocks chemical manufacturing industry margins sometimes volatile affected global regional supplyanddemand balance refined products changes price crude oil used refinery feedstock industry margins also influenced refinedproduct inventory levels geopolitical events refinery maintenance programs disruptions refineries resulting unplanned outages may due severe weather operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing network effectiveness fs4 crudeoil productsupply functions economic returns invested capital profitability also affected volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refinery distribution network company’s significant marketing areas west coast north america us gulf coast latin america asia southern africa united kingdom chevron operates ownership interests refineries areas except latin america downstream earnings especially united states weak mid2007 mid2008 due mainly increasing prices crude oil used refining process always fully recovered sales prices refined products margins significantly improved second half 2008 price crude oil declined part downstream strategy focus areas market strength company announced plans sell marketing businesses several countries refer discussion “operating developments” industry margins future may volatile influenced changes price crude oil used refinery feedstock changes supply demand crude oil refined products industry supplyanddemand balance affected disruptions refineries resulting maintenance programs unplanned outages including weatherrelated disruptions refinedproduct inventory levels geopolitical events refer pages fs7 fs8 additional discussion company’s downstream operations chemicals earnings petrochemicals business closely tied global chemical demand industry inventory levels plant capacity utilization feedstock fuel costs tend follow crude oil natural gas price movements also influence earnings segment refer “results operations” section page fs8 additional discussion chemicals earnings operating developments key operating developments events 2008 early 2009 included following upstream australia started production train 5 17 percentowned north west shelf venture onshore liquefiednaturalgas lng facility west australia increasing export capacity 12 million metric tons annually 16 million company also announced plans lng project initially capacity 5 million tons per year process natural gas chevron’s 100 percentowned wheatstone discovery located northwest coast mainland australia canada finalized agreements government newfoundland labrador develop 27 percentowned hebron heavyoil project eastern coast indonesia achieved first oil north duri field area 12 chevron operates 100 percent interest maximum total crudeoil production 34000 barrels per day expected 2012 kazakhstan completed second phase major expansion production operations processing facilities 50 percentowned tengizchevroil affiliate increasing total crudeoil production capacity 400000 540000 barrels per day middle east signed agreement kingdom saudi arabia extend 2039 company’s operation kingdom’s 50 percent interest oil gas resources onshore area partitioned neutral zone kingdom state kuwait nigeria started production offshore 68 percentowned operated agbami field total oil production expected reach maximum 250000 barrels per day end 2009 company partners also announced plans develop 30 percentowned partneroperated offshore usan field expected maximum total production 180000 barrels crude oil per day within one year startup 2012 republic congo confirmed startup 32 percentowned partneroperated mohobilondo deepwater project expected reach maximum total crudeoil production 90000 barrels per day 2010 thailand approved construction gulf thailand 70 percentowned operated platong gas ii project designed processing capacity 420 million cubic feet natural gas per day united states began production 75 percentowned operated blind faith project deepwater gulf mexico total volumes expected ramp 2009 approximately 65000 barrels crude oil 55 million cubic feet natural gas per day downstream company announced plans sell marketingrelated businesses brazil nigeria benin cameroon republic congo côte d’ivoire togo kenya uganda fs5 common stock dividends increased quarterly common stock dividend 121 percent april 2008 065 per share 2008 21st consecutive year company increased annual dividend payment common stock repurchase program acquired 80 billion common shares 2008 part 15 billion repurchase program initiated 2007 results operations major operating areas following section presents results operations company’s business segments upstream downstream chemicals well “all other” includes mining power generation businesses various companies departments managed corporate level company’s investment dynegy prior sale may 2007 income also presented us international geographic areas upstream downstream business segments refer note 9 beginning page fs38 discussion company’s “reportable segments” defined financial accounting standards board fasb statement 131 disclosures segments enterprise related information section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream exploration production us upstream income 71 billion 2008 increased 26 billion 2007 higher average prices crude oil natural gas increased earnings 31 billion periods also contributing higher earnings gains approximately 1 billion asset sales including 600 million gain assetexchange transaction partially offsetting benefits adverse effects 16 billion associated lower oilequivalent production higher operating expenses included approximately 400 million expenses resulting damage facilities gulf mexico caused hurricanes gustav ike september income 45 billion 2007 increased approximately 260 million 2006 results 2007 benefited approximately 700 million higher prices crude oil natural gas liquids benefit income partially offset effects decline oilequivalent production increase depreciation operating exploration expenses company’s average realization crude oil natural gas liquids 2008 8843 per barrel compared 6316 2007 5666 2006 average natural gas realization 790 per thousand cubic feet 2008 compared 612 629 2007 2006 respectively net oilequivalent production 2008 averaged 671000 barrels per day 97 percent 121 percent 2007 2006 respectively decrease 2007 2008 mainly due normal field declines adverse impact hurricanes decline 2007 2006 due primarily normal field declines net liquids component oilequivalent production 2008 averaged 421000 barrels per day approximately 8 percent 2007 9 percent compared 2006 net natural gas production averaged 15 billion cubic feet per day 2008 12 percent 2007 17 percent 2006 refer “selected operating data” table page fs10 threeyear comparative production volumes united states international upstream exploration production international upstream income 146 billion 2008 increased 43 billion 2007 higher prices crude oil natural gas increased earnings 49 billion partially offsetting benefit higher prices impact 18 billion associated reduction crudeoil sales volumes due timing certain cargo liftings higher depreciation operating expenses foreign currency effects benefited earnings 873 million 2008 compared reductions earnings 417 million 2007 371 million 2006 fs6 income 2007 103 billion increased 14 billion 2006 earnings 2007 benefited approximately 16 billion higher prices primarily crude oil 300 million increased liftings nonrecurring incometax items also benefited earnings periods benefits income partially offset impact higher operating depreciation expenses company’s average realization crude oil natural gas liquids 2008 8651 per barrel compared 6501 2007 5765 2006 average natural gas realization 519 per thousand cubic feet 2008 compared 390 373 2007 2006 respectively net oilequivalent production 186 million barrels per day 2008 declined 1 percent 2 percent 2007 2006 respectively volumes year included production oil sands canada volumes 2006 also included production operating service agreement venezuela conversion jointstock company october year absent impact higher prices certain productionsharing variableroyalty agreements net oilequivalent production increased 2007 2008 decline 2007 2006 associated impact contract conversion venezuela impact higher prices productionsharing agreements net liquids component oilequivalent production 13 million barrels per day 2008 decrease 5 percent 2007 9 percent 2006 net natural gas production 36 billion cubic feet per day 2008 9 percent 15 percent 2007 2006 respectively refer “selected operating data” table page fs10 threeyear comparative international production volumes us downstream refining marketing transportation us downstream earnings 14 billion 2008 increased 400 million 2007 due mainly improved margins sale refined products gains derivative commodity instruments operating expenses higher periods income 966 million 2007 decreased nearly 1 billion 2006 decline associated mainly lower refinedproduct margins higher planned unplanned refinery downtime year earlier operating expenses also higher 2007 2006 sales volumes refined products 141 million barrels per day 2008 decrease 3 percent 2007 decline associated reduced sales gasoline fuel oil sales volumes refined products 146 million barrels per day 2007 decrease 3 percent 2006 reported sales volume 2007 different basis 2006 due change accounting rules became effective april 1 2006 certain purchaseandsale buy sell contracts counterparty excluding impact accounting standard refinedproduct sales 2007 decreased 1 percent 2006 branded gasoline sales volumes 601000 barrels per day 2008 4 percent 2 percent 2007 2006 respectively refer “selected operating data” table page fs10 threeyear comparative sales volumes gasoline refined products refineryinput volumes refer also note 14 “accounting buysell contracts” page fs43 discussion accounting purchaseandsale contracts counterparty international downstream refining marketing transportation international downstream income 21 billion 2008 decreased nearly 500 million 2007 earnings 2007 included gains approximately 1 billion sale assets included interest refinery marketing assets benelux region europe 500 million improvement otherwise years associated primarily benefit gains derivative commodity instruments partially offset impact lower margins sale refined products foreign currency effects increased earnings 193 million 2008 compared 62 million 2007 income 2007 25 billion increased 500 million 2006 largely due gains asset sales margins sale refined products 2007 slightly 2006 operating expenses higher earnings company’s shipping operations lower fs7 refinedproduct sales volumes 202 million barrels per day 2008 1 percent lower 2007 due mainly reduced sales gas oil fuel oil refined product sales volumes 203 million barrels per day 2007 5 percent lower 2006 decline 2007 largely due impact asset sales accountingstandard change buysell contracts excluding accounting change sales decreased 4 percent refer “selected operating data” table page fs10 threeyear comparative sales volumes gasoline refined products refineryinput volumes refer also note 14 “accounting buysell contracts” page fs43 discussion accounting purchaseandsale contracts counterparty chemicals segment includes company’s oronite subsidiary 50 percentowned chevron phillips chemical company llc cpchem 2008 earnings 182 million compared 396 million 539 million 2007 2006 respectively earnings declined 2008 due lower sales volumes commodity chemicals cpchem higher expenses planned maintenance activities also contributed earnings decline earnings also declined company’s oronite subsidiary due lower volumes higher operating expenses 2007 earnings 396 million decreased 143 million 2006 due impact lower margins sale commodity chemicals cpchem partially offset improved margins oronite’s sales additives lubricants fuel includes mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies company’s interest dynegy prior sale may 2007 net charges 2008 increased 14 billion 2007 results 2007 included 680 million gain sale company’s investment dynegy common stock loss approximately 175 million associated early redemption texaco capital inc bonds results 2008 included net unfavorable corporate tax items increased costs environmental remediation sites previously closed sold foreign exchange effects also contributed increase net charges years net charges 26 million 2007 decreased 490 million 2006 due mainly dynegyrelated gain 2007 consolidated statement income comparative amounts certain income statement categories shown sales operating revenues increased comparative periods due mainly higher prices crude oil natural gas refined products fs8 income equity affiliates increased 2008 2007 improved upstreamrelated earnings tengizchevroil tco due higher prices crude oil lower income equity affiliates 2006 2007 mainly due decline earnings cpchem dynegy sold may 2007 downstream affiliates asiapacific area partially offsetting declines improved results tco income full year petroboscan converted operating service agreement jointstock company october 2006 refer note 12 beginning page fs41 discussion chevron’s investments affiliated companies income 27 billion 2008 included gains approximately 13 billion asset sales income 27 billion 2007 included net gains 17 billion asset sales loss 245 million early redemption debt interest income approximately 340 million 2008 600 million 2007 2006 foreign currency effects benefited income 355 million 2008 reducing income 352 million 260 million 2007 2006 respectively crude oil product purchases 2008 increased 381 billion 2007 due higher prices crude oil natural gas refined products crude oil product purchases 2007 increased 5 billion 2006 due factors operating selling general administrative expenses 2008 increased approximately 37 billion 2007 primarily due 12 billion higher costs employee contract labor 800 million increased costs materials services equipment 700 million uninsured losses associated hurricanes gulf mexico 2008 increase 300 million environmental remediation activities total expenses 31 billion higher 2007 2006 increases recorded number categories including 15 billion higher costs employee contract labor exploration expenses 2008 declined 2007 due mainly lower amounts well writeoffs operations united states expenses 2007 essentially unchanged 2006 depreciation depletion amortization expenses increased 2008 2007 largely due higher depreciation rates certain crude oil natural gas producing fields reflecting completion highercost development projects assetretirement obligations increase 2006 2007 reflects increase charges related asset writedowns higher depreciation rates certain crude oil natural gas producing fields worldwide taxes income decreased 2007 2008 periods mainly due lower import duties result effects 2007 sales company’s benelux refining marketing businesses decline import volumes united kingdom taxes income increased 2006 2007 due higher import duties company’s uk downstream operations 2007 interest debt expense decreased significantly 2008 interestrelated amounts capitalized interest debt expense 2007 decreased 2006 primarily due lower average debt balances higher amounts interest capitalized effective income tax rates 44 percent 2008 42 percent 2007 46 percent 2006 rates higher 2007 2008 primarily due greater proportion income earned tax jurisdictions higher income tax rates addition 2007 period included relatively low effective tax rate sale company’s investment dynegy common stock sale downstream assets europe rates lower 2007 compared 2006 due mainly impact nonrecurring items 2007 mentioned absence 2006 charges related taxlaw change increased tax rates upstream operations uk north sea settlement tax claim venezuela refer also discussion income taxes note 16 beginning page fs45 fs9 selected operating data12 liquidity capital resources cash equivalents marketable securities total balances 96 billion 81 billion december 31 2008 2007 respectively cash provided operating activities 2008 296 billion compared 250 billion 2007 243 billion 2006 cash provided operating activities net contributions employee pension plans approximately 800 million 300 million 400 million 2008 2007 2006 respectively cash provided investing activities included proceeds asset sales 15 billion 2008 33 billion 2007 10 billion 2006 december 31 2008 restricted cash 367 million associated capitalinvestment projects company’s pascagoula mississippi refinery angola liquefied natural gas project invested shortterm marketable securities reclassified cash equivalents longterm asset consolidated balance sheet dividends company paid dividends approximately 52 billion 2008 48 billion 2007 44 billion 2006 april 2008 company increased quarterly common stock dividend 121 percent 065 per share debt capital lease minority interest obligations total debt capital lease balances 89 billion december 31 2008 72 billion yearend 2007 company also minority interest obligations 469 million 204 million december 31 2008 2007 respectively 17 billion increase total debt capital lease obligations 2008 included net effect approximate 27 billion increase commercial paper 749 million chevron canada funding company bonds matured company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 78 billion december 31 2008 55 billion yearend 2007 amounts 50 billion 44 billion reclassified longterm end period respectively yearend 2008 settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis yearend 2008 company 5 billion committed credit facilities various major banks permit refinancing shortterm obligations longterm basis facilities support commercialpaper borrowing also used general corporate purposes company’s practice continually fs10 replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate terms new commitments future subject market conditions time renewal borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2008 addition company automatic shelf registration statement expires march 2010 unspecified amount nonconvertible debt securities issued guaranteed company january 2009 company’s board directors authorized issuance one series notes debentures aggregate amount 5 billion term exceed ten years december 31 2008 company outstanding public bonds issued chevron corporation profit sharingsavings plan trust fund texaco capital inc union oil company california securities guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions periods low prices crude oil natural gas narrow margins refined products commodity chemicals company flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program september 2007 company authorized acquisition 15 billion additional common shares time prevailing prices permitted securities laws legal requirements subject market conditions factors program period three years may discontinued time december 31 2008 119 million shares acquired program 101 billion including 80 billion 2008 amounts include shares acquired october 2008 part assetexchange transaction described note 2 beginning page fs34 company acquire shares early 2009 plan acquire shares 2009 first quarter capital exploratory expenditures total reported expenditures 2008 228 billion including 23 billion company’s share affiliates’ expenditures require cash outlays company 2007 2006 expenditures 200 billion 166 billion respectively including company’s share affiliates’ expenditures 23 billion 19 billion corresponding periods 228 billion expenditures 2008 threefourths 175 billion related upstream activities approximately percentage also expended upstream operations 2007 2006 international upstream accounted 70 percent worldwide upstream investment three years reflecting company’s continuing focus opportunities available outside united states company estimates 2009 capital exploratory expenditures 228 billion including 18 billion spending affiliates threefourths total 175 billion budgeted exploration production activities 139 billion amount outside united states spending 2009 primarily targeted exploratory prospects deepwater us gulf mexico western africa gulf thailand major development projects angola australia brazil indonesia nigeria thailand deepwater us gulf mexico also included onetime payments associated upstream operating agreements china partitioned neutral zone saudi arabia kuwait fs11 capital exploratory expenditures worldwide downstream spending 2009 estimated 43 billion 20 billion projects united states capital projects include upgrades refineries united states south korea construction gastoliquids facility support associated upstream projects investments chemicals technology corporate businesses 2009 budgeted 10 billion technology investments include projects related unconventional hydrocarbon technologies oil gas reservoir management gasfired renewable power generation pension obligations 2008 company’s pension plan contributions 839 million including 577 million us plans company estimates contributions 2009 approximately 800 million actual contribution amounts dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs18 financial ratios financial ratios current ratio current assets divided current liabilities current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2008 book value inventory lower replacement costs based average acquisition costs year approximately 9 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest divided beforetax interest costs company’s interest coverage ratio higher 2007 2008 2006 2007 primarily due higher beforetax income lower average debt balances subsequent years debt ratio total debt percentage total debt plus equity increase 2007 2008 primarily due higher debt decrease 2006 2007 due lower debt higher stockholders’ equity balance guarantees offbalancesheet arrangements contractual obligations contingencies direct guarantee company’s guarantee approximately 600 million associated certain payments terminaluse agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduced certain fees paid affiliate fs12 numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2008 company paid 48 million indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims must asserted later february 2009 equilon indemnities later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments february 2009 shell delivered letter company purporting preserve unmatured claims certain equilon indemnities letter provides estimate ultimate claim amount management believe letter provides basis estimate amount range loss potential range loss respect equilon motiva indemnities company posts assets collateral made payments indemnities amounts payable indemnities described net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 indemnification agreement company’s liability unlimited april 2022 indemnification expires acquirer shares certain environmental remediation costs maximum obligation 200 million reached december 31 2008 securitization 2008 company terminated program used securitize downstreamrelated trade accounts receivable yearend 2007 balance securitized receivables 675 million december 31 2008 company securitization arrangements place minority interests company commitments 469 million related minority interests subsidiary companies longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2009 64 billion 2010 40 billion 2011 36 billion 2012 15 billion 2013 13 billion 2014 43 billion portion commitments may ultimately shared project partners total payments agreements approximately 51 billion 2008 37 billion 2007 30 billion 2006 following table summarizes company’s significant contractual obligations contractual obligations1 excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 22 beginning page fs51 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect results operations consolidated financial position liquidity single period 50 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20102011 period include obligations purchase company’s share natural gas liquids regasified natural gas associated operations 364 percentowned angola lng affiliate lng plant expected commence operations 2012 designed produce 52 million metric tons liquefied natural gas related natural gas liquids per year volumes prices associated purchase obligations neither fixed determinable financial derivative instruments market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk discussed represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk fs13 factors” part item 1a company’s 2008 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activity material company’s financial position net income cash flows 2008 company’s market exposure positions monitored managed daily basis internal risk control group ensure compliance company’s risk management policies approved audit committee company’s board directors derivative instruments used company’s risk management trading activities consist mainly futures options swap contracts traded nymex new york mercantile exchange electronic platforms ice intercontinental exchange globex chicago mercantile exchange addition crude oil natural gas refinedproduct swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2008 quarterly average increase 160 million total assets quarterly average decrease 1 million total liabilities company uses valueatrisk var model estimate potential loss fair value single day effect adverse changes market conditions derivative instruments held issued recorded balance sheet december 31 2008 derivative instruments accordance fas statement 133 “accounting derivative instruments hedging activities” amended fas 133 var maximum loss exceeded within given probability confidence level given period time company’s var model uses monte carlo simulation method involves generating hypothetical scenarios specified probability distribution constructing full distribution portfolio’s potential values var model utilizes exponentially weighted moving average computing historical volatilities correlations 95 percent confidence level oneday holding period company’s 95 percent oneday var corresponds unrealized loss portfolio value would exceeded average one every 20 trading days portfolio held constant one day oneday holding period based assumption marketrisk positions liquidated hedged within one day hedging risk management company uses conventional exchangetraded instruments futures options well nonexchangetraded swaps liquidated hedged effectively within one day table presents 95 percentoneday var company’s primary risk exposures area derivative commodity instruments december 31 2008 2007 higher amounts 2008 associated increase price volatility commodities year foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income aggregate effect hypothetical 10 percent increase value us dollar yearend 2008 would reduction fair value foreign exchange contracts approximately 100 million effect would opposite hypothetical 10 percent decrease value us dollar yearend 2008 interest rates company enters interestrate swaps time part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2008 company interestrate swaps floatingrate debt company’s interestrate swaps fixedrate debt matured january 2009 fs14 transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer information note 12 consolidated financial statements page fs42 discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive october 2008 59 cases settled company party related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater terms agreement confidential material company’s results operations liquidity financial position chevron party 37 pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future settlement 59 lawsuits set precedents related standards liability used judge merits claims corrective measures required monetary damages assessed remaining lawsuits claims future lawsuits claims result company’s ultimate exposure related pending lawsuits claims currently determinable could material net income one period company longer uses mtbe manufacture gasoline united states rfg patent fourteen purported class actions brought consumers purchased reformulated gasoline rfg january 1995 august 2005 alleging unocal misled california air resources board adopting standards composition rfg overlapped unocal’s undisclosed pending patents parties agreed settlement calls among things unocal pay 48 million establishment cy pres fund administer payout award court approved final settlement november 2008 ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 million certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively chevron third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations april 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 8 billion would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 83 billion could assessed chevron unjust enrichment engineer’s report binding court chevron also believes engineer’s work performed report prepared manner contrary law violation court’s orders chevron submitted rebuttal report asked court strike report entirety november 2008 engineer revised report without additional evidence recommended increase financial compensation purported damages total 189 billion increase assessment purported unjust enrichment total 84 billion chevron submitted rebuttal revised report chevron continue vigorous defense attempted imposition liability management believe estimate reasonably possible loss range loss made case due defects associated engineer’s report management believe report utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management fs15 estimate reasonable possible loss range loss environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws included 1818 million yearend 2008 reserve balance remediation activities 248 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2008 120 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s consolidated financial position liquidity remaining yearend 2008 environmental reserves balance 1698 million 968 million related current former sites company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 730 million associated various sites international downstream 117 million upstream 390 million chemicals 154 million 69 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2008 recorded liability material company’s financial position results operations liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company accounts asset retirement obligations accordance fasb statement 143 accounting asset retirement obligations fas 143 fas 143 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability fs16 reasonably estimated liability balance approximately 94 billion asset retirement obligations yearend 2008 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 24 beginning page fs58 related fas 143 company’s adoption 2005 fasb interpretation fin 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 discussion “environmental matters” income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 16 beginning page fs45 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity emergency economic stabilization act 2008 contained number energy taxrelated provisions known energy improvement extension act 2008 act signed us law october 2008 act includes two provisions affect chevron’s tax liability beginning fourth quarter 2008 act freezes 6 percent domestic manufacturer’s deduction income us oil gas operations scheduled increase 9 percent 2010 effective 2009 act expands current foreign tax credit ftc limitation foreign oil gas extraction income also include foreign downstream income known foreign oil related income change expected impact chevron’s utilization ftcs suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions december 31 2008 company approximately 21 billion suspended exploratory wells included properties plant equipment increase 458 million 2007 balance reflected increase 421 million 2006 future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 21 billion suspended wells yearend 2008 uncertain pending future activities including normal project evaluation additional drilling refer note 20 beginning page fs48 additional discussion suspended wells equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 million possible maximum net amount could owed chevron estimated 150 million timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures con fs17 sidered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2008 approximately 31 billion consolidated companies included expenditures approximately 13 billion environmental capital expenditures 18 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2009 total worldwide environmental capital expenditures estimated 22 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment neces sary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation crude oil natural gas reserves sec rules require “ geological engineering data demonstrate reasonable certainty reserves recoverable future years known reservoirs existing economic operating conditions ie prices costs date estimate made” refer table v “reserve quantity information” beginning page fs67 changes estimates three years ending december 31 2008 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs74 estimates provedreserve values three years ended december 31 2008 based yearend prices time note 1 consolidated financial statements beginning page fs32 includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment properties plant equipment investments affiliates” beginning page fs20 includes reference conditions downward revisions provedreserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs32 development selection accounting estimates fs18 assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pensionplan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 22 beginning page fs51 includes information funded status company’s pension opeb plans end 2008 2007 components pension opeb expense three years ending december 31 2008 underlying assumptions periods pension opeb expense recorded consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments yearend 2008 2007 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet funded status overfunded pension plans recorded longterm asset “deferred charges assets” funded status underfunded unfunded pension opeb plans recorded “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense recorded “accumulated comprehensive loss” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies expected longterm rate return us pension plan assets account 68 percent company’s pension plan assets remained 78 percent since 2002 10 years ending december 31 2008 actual asset returns averaged 37 percent plan actual asset returns 10 years ending december 31 2007 averaged 87 percent actual return 2008 negative associated broad decline financial markets second half year yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2008 company selected 63 percent discount rate major us pension postretirement plans rate selected based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2008 discount rates end 2007 2006 63 percent 58 percent respectively increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2008 770 million indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2008 approximately 70 million 1 percent increase discount rate plan accounted 61 percent companywide pension obligation would reduced total pension plan expense 2008 approximately 140 million increase discount rate would decrease pension obligation thus changing funded status plan recorded consolidated balance sheet total pension liability consolidated balance sheet december 31 2008 underfunded plans approximately 40 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 250 million would decreased plan’s underfunded status approximately 20 billion 18 billion plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2008 company’s pension plan contributions 839 million including 577 million us plans 2009 company estimates contributions approximately 800 million actual contribution amounts fs19 dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2008 179 million total liability reflected unfunded status plans end 2008 29 billion indication discount rate sensitivity determination opeb expense 2008 1 percent increase discount rate company’s primary us opeb plan accounted 67 percent companywide opeb expense would decreased opeb expense approximately 20 million 025 percent increase discount rate plan accounted 86 percent companywide opeb liabilities would decreased total opeb liabilities end 2008 approximately 56 million main us postretirement medical plan annual increase company contributions limited 4 percent per year active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 7 percent 2009 gradually drop 5 percent 2017 beyond indication health care costtrend rate sensitivity determination opeb expense 2008 1 percent increase rates main us opeb plan accounted 86 percent companywide opeb liabilities would increased opeb expense 8 million differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 22 beginning page fs51 information 60 billion beforetax actuarial losses recorded company december 31 2008 description method used amortize costs estimate costs recognized expense 2009 impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated provedreserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions major individual impairments ppe recorded three years ending december 31 2008 estimate sensitivity earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation fs20 sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values business combinations purchaseprice allocation accounting business combinations requires allocation company’s purchase price various assets liabilities acquired business respective fair values company uses available information make fair value determinations major acquisitions may hire independent appraisal firm assist making fair value estimates instances assumptions respect timing amount future revenues expenses associated asset might used determining fair value actual timing amount net cash flows revenues expenses related asset time may differ materially initial estimates timing delayed significantly net cash flows decline significantly asset could become impaired effective january 1 2009 accounting business combinations change refer note 19 page fs48 goodwill resulting business combination subject amortization required fasb statement 142 goodwill intangible assets company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally records losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters ben efits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 16 beginning page fs45 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2008 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards fasb statement 141 revised 2007 business combinations fas 141r december 2007 fasb issued fas 141r became effective business combination transactions acquisition date january 1 2009 standard requires acquiring entity business combination recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured respective fair values also requires acquisitionrelated costs well restructuring costs acquirer expects incur obligated acquisition date recorded income rather included purchaseprice determination finally standard requires recognition contingent arrangements acquisitiondate fair values subsequent changes fair value generally reflected income fasb staff position fas 141ra accounting assets acquired liabilities assumed business combination fsp fas 141ra february 2009 fasb approved issuance fsp fas 141ra became effective business combinations acquisition date january 1 2009 standard requires asset liability arising contingency business combination recognized fair value fair value reasonably determined cannot reasonably determined asset liability need recognized accordance fasb statement 5 accounting contingencies fasb interpretation 14 reasonable estimation amount loss fasb statement 160 noncontrolling interests consolidated financial statements amendment arb 51 fas 160 fasb issued fas 160 december 2007 became effective company january 1 2009 retroactive adoption standard’s presentation disclosure requirements existing minority interests standard requires ownership interests subsidiaries held parties parent presented within fs21 equity section consolidated balance sheet separate parent’s equity also requires amount consolidated net income attributable parent noncontrolling interest clearly identified presented face consolidated statement income certain changes parent’s ownership interest accounted equity transactions subsidiary deconsolidated noncontrolling equity investment former subsidiary initially measured fair value implementation fas 160 significantly change presentation company’s consolidated statement income consolidated balance sheet fasb statement 161 disclosures derivative instruments hedging activities fas 161 march 2008 fasb issued fas 161 became effective company january 1 2009 standard amends expands disclosure requirements fasb statement 133 accounting derivative instruments hedging activities fas 161 requires disclosures related objectives strategies using derivatives fairvalue amounts gains losses derivative instruments creditriskrelated contingent features derivative agreements company’s disclosures derivative instruments expanded include tabular representation location fair value amounts derivative instruments balance sheet fair value gains losses income statement gains losses associated cash flow hedges recognized earnings comprehensive income fasb staff position fas 132r1 employer’s disclosures postretirement benefit plan assets fsp fas 132r1 december 2008 fasb issued fsp fas 132r1 becomes effective company’s reporting december 31 2009 standard amends expands disclosure requirements plan assets defined benefit pension postretirement plans provide users financial statements understanding investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fairvalue measurements using significant unobservable inputs changes plan assets period significant concentrations risk within plan assets company prefund postretirement plan obligations effect company’s disclosures pension plan assets result adoption fsp fas 132r1 depend company’s plan assets time fs22 page intentionally left blank fs23 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx february 20 2009 stockholders record numbered approximately 205000 restrictions company’s ability pay dividends fs24 management’s responsibility financial statements stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2008 effectiveness company’s internal control financial reporting december 31 2008 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein david j o’reilly patricia e yarrington mark humphrey chairman board vice president vice president chief executive officer chief financial officer comptroller february 26 2009 fs25 report independent registered public accounting firm stockholders board directors chevron corporation opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income stockholders’ equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 2008 december 31 2007 results operations cash flows three years period ended december 31 2008 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2008 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions discussed note 14 consolidated financial statements company changed method accounting buysell contracts april 1 2006 discussed note 16 consolidated financial statements company changed method accounting uncertain income tax positions january 1 2007 company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp san francisco california february 26 2009 fs26 consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs27 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs28 consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs29 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs30 consolidated statement stockholders’ equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs31 note 1 summary significant accounting policies general exploration production upstream operations consist exploring developing producing crude oil natural gas marketing natural gas refining marketing transportation downstream operations relate refining crude oil finished petroleum products marketing crude oil many products derived petroleum transporting crude oil natural gas petroleum products pipeline marine vessel motor equipment rail car chemical operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lubricant oil additives company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity foreign currency exposures gains losses derivative instruments reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost fs32 properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 20 beginning page fs48 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate refining marketing transportation chemical areas impairment reviews generally done basis refinery plant marketing area marketing assets country impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value required financial accounting standards board fasb statement 143 accounting asset retirement obligations fas 143 fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 24 beginning page fs58 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses mining assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization required fasb statement 142 goodwill intangible assets company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas fs33 mineral producing properties liability aro made following fas 143 refer note 24 beginning page fs58 discussion fas 143 federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included currency translation adjustment “stockholders’ equity” revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized basis company’s net working interest entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs27 refer note 14 page fs43 discussion accounting buysell arrangements stock options sharebased compensation company issues stock options sharebased compensation employees accounts transactions provisions fasb statement 123r sharebased payment fas 123r equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes newly issued graded awards straightline basis tax benefits deductions exercise stock options presented financing cash inflows consolidated statement cash flows refer note 21 beginning page fs49 description company’s sharebased compensation plans information related awards granted plans note 2 follows information excess tax benefits reported company’s statement cash flows note 2 information relating consolidated statement cash flows fs34 accordance cashflow classification requirements fas 123r sharebased payment “net decrease operating working capital” includes reductions 106 96 94 excess income tax benefits associated stock options exercised 2008 2007 2006 respectively amounts offset “net purchases treasury shares” 2008 “net purchases shortterm investments” consist 367 restricted cash associated capitalinvestment projects company’s pascagoula mississippi refinery angola liquefied natural gas project invested shortterm marketable securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet 2007 company issued 650 tax exempt mississippi gulf opportunity zone bond source funds pascagoula refinery project “net purchases treasury shares” represents cost common shares less cost shares issued sharebased compensation plans purchases totaled 8011 7036 5033 2008 2007 2006 respectively consolidated statement cash flows 2008 excludes changes consolidated balance sheet affect cash “net purchases treasury shares” excludes 680 treasury shares acquired exchange us upstream property 280 cash carrying value property “properties plant equipment” consolidated balance sheet significant “increase accounts payable accrued liabilities” excludes 2450 increase “accrued liabilities” offset “properties plant equipment” consolidated balance sheet amount related accruals associated upstream operating agreements outside united states “capital expenditures” excludes 1400 increase “properties plant equipment” ppe related acquisition additional interest equity affiliate required change consolidated method accounting investment 2008 addition ppe offset primarily reductions “investments advances” working capital increase “noncurrent deferred income tax” liabilities refer also note 24 beginning page fs58 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2008 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table net noncash additions 5153 2008 3560 2007 440 2006 note 3 stockholders’ equity retained earnings december 31 2008 2007 included approximately 7951 7284 respectively company’s share undistributed earnings equity affiliates december 31 2008 109 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron corporation longterm incentive plan ltip addition approximately 409000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan nonemployee directors’ plan note 4 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method fs35 2008 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa summarized financial information cusa consolidated subsidiaries presented table gives retroactive effect reorganizations occurred january 1 2006 however financial information following table may reflect financial position operating results periods presented reorganization actually occurred date note 5 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries presented following table restrictions ctc’s ability pay dividends make loans advances december 31 2008 note 6 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 12 page fs41 discussion tco operations summarized financial information 100 percent tco presented table note 7 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company uses international swaps derivatives association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” “longterm receivables net” “deferred credits noncurrent obligations” gains losses company’s risk management activities fs36 reported either “sales operating revenues” “purchased crude oil products” whereas trading gains losses reported “other income” foreign currency company enters forward exchange contracts generally terms 180 days less manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments forecasted occur within 180 days forward exchange contracts recorded fair value balance sheet resulting gains losses reflected income fair values outstanding contracts reported consolidated balance sheet “accounts notes receivable” “accounts payable” gains losses reported “other income” interest rates company enters interest rate swaps time part overall strategy manage interest rate risk debt terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt accounted fair value hedges fair values interest rate swaps reported consolidated balance sheet “accounts notes receivable” “accounts payable” interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2008 company interestrate swaps floatingrate debt fair value fair values derived quoted market prices independent thirdparty quotes available present value expected cash flows fair values reflect cash would received paid instruments settled yearend longterm debt 1221 2132 estimated fair values 1414 2354 december 31 2008 2007 respectively company holds cash equivalents marketable securities us nonus portfolios instruments held primarily time deposits money market funds fixed rate bonds cash equivalents marketable securities carryingfair values 7271 5427 december 31 2008 2007 respectively balances 7058 4695 respective yearends classified cash equivalents average maturities 90 days remainder classified marketable securities average maturities approximately one year december 31 2008 restricted cash carryingfair value 367 related capitalinvestment projects company’s pascagoula mississippi refinery angola liquefied natural gas project reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet restricted cash invested shortterm marketable securities fair values financial derivative instruments end 2008 2007 material concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide consequence company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers note 8 fair value measurements company implemented fasb statement 157 fair value measurements fas 157 january 1 2008 fas 157 amended february 2008 fasb staff position fsp fas 1571 application fasb statement 157 fasb statement 13 related interpretive accounting pronouncements address leasing transactions fsp fas 1572 effective date fasb statement 157 delayed company’s application fas 157 nonrecurring nonfinancial assets liabilities january 1 2009 fas 157 amended october 2008 fsp fas 1573 determining fair value financial asset market asset active clarifies application fas 157 assets participating inactive markets implementation fas 157 material effect company’s results operations consolidated financial position effect company’s existing fairvalue measurement practices however fas 157 requires disclosure fairvalue hierarchy inputs fs37 company uses value asset liability three levels fairvalue hierarchy described follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract level 3 unobservable inputs company use level 3 inputs recurring fairvalue measurements beginning january 1 2009 level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities fairvalue hierarchy assets liabilities measured fair value december 31 2008 follows assets liabilities measured fair value recurring basis marketable securities company calculates fair value marketable securities based quoted market prices identical assets liabilities derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value virtually offsetting amount income derivatives identical similar provisions contracts publicly traded regular basis company uses market values publicly traded instruments input fairvalue calculations company’s derivative instruments principally include crude oil natural gas refinedproduct futures swaps options forward contracts well interestrate swaps foreign currency forward contracts derivatives classified level 1 include futures swaps options contracts traded active markets nymex new york mercantile exchange derivatives classified level 2 include swaps including interest rate options forward including foreign currency contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information company incorporates internal review evaluation assessment procedures including comparison level 2 fair values derived company’s internally developed forward curves sample basis pricing information document reasonable logical supportable fairvalue determinations proper level classification note 9 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates purpose investments grouped follows upstream exploration production downstream refining marketing transportation chemicals first three groupings represent company’s “reportable segments” “operating segments” defined financial accounting standards board fasb statement 131 disclosures segments enterprise related information fas 131 segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined fas 131 codm company’s executive committee senior officers includes chief executive officer turn reports board directors chevron corporation operating segments represent components company described fas 131 terms engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assess performance c discrete financial information available segment managers reportable segments accountable directly maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major fs38 projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members executive committee also individual management responsibilities participate committees purposes acting codm “all other” activities include company’s interest dynegy may 2007 chevron sold interest mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” aftertax segment income major operating area presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2008 2007 follows “all other” assets consist primarily worldwide cash equivalents marketable securities real estate information systems mining operations power generation businesses technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2008 2007 2006 presented table following page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils kerosene lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading crude oil refined products revenues chemicals segment derived primarily manufacture sale additives lubricants fuel “all other” activities include revenues mining operations coal minerals power generation businesses insurance operations real estate activities technology companies fs39 united states single country accounted 10 percent company’s total sales operating revenues 2008 segment income taxes segment income tax expense years 2008 2007 2006 follows segment information additional information segmentation major equity affiliates contained note 12 beginning page fs41 information related properties plant equipment segment contained note 13 page fs43 note 10 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” leasing arrangements involve tanker charters crude oil production processing equipment service stations office buildings facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2008 2007 2006 follows fs40 contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2008 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 11 restructuring reorganization costs 2007 company implemented restructuring reorganization program downstream operations approximately 900 employees eligible severance payments december 31 2008 approximately 700 employees terminated program associated positions located outside united states program expected completed end 2009 shown table activity company’s liability related downstream reorganization associated charges income categorized “operating expenses” “selling general administrative expenses” consolidated statement income note 12 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period december 31 2008 company’s carrying value investment tco 210 higher amount underlying equity tco net assets difference results chevron acquiring portion interest tco value greater underlying equity portion tco’s assets fs41 petropiar chevron 30 percent interest petropiar joint stock company formed 2008 operate hamaca heavy oil production upgrading project located venezuela’s orinoco belt 25year contract term prior formation petropiar chevron 30 percent interest hamaca project december 31 2008 company’s carrying value investment petropiar approximately 250 less amount underlying equity petropiar net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2008 company’s carrying value investment petroboscan approximately 290 higher amount underlying equity petroboscan net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng ltd chevron 36 percent interest angola lng ltd process liquefy natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs holdings joint venture imports refines markets petroleum products petrochemicals predominantly south korea caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium provides critical export route crude oil tco karachaganak star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company ltd sprc owns star refinery thailand petroleum authority thailand owns remaining 36 percent sprc escravos gastoliquids chevron nigeria limited cnl 75 percent interest escravos gastoliquids egtl 25 percent joint venture owned nigeria national petroleum company december 1 2008 sasol ltd provided 50 percent cnl’s funding require ments venture riskbased financing returns based project performance effective december 1 2008 chevron acquired additional 37 percent obligation sasol retaining 13 percent funding obligation date chevron changed method accounting egtl investment equity consolidated venture formed convert natural gas produced chevron’s nigerian operations liquid products sale international markets caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2008 fair value chevron’s share cal common stock approximately 670 decline value company’s carrying value 723 million end 2008 deemed temporary colonial pipeline company chevron owns approximate 23 percent equity interest colonial pipeline company colonial pipeline system runs texas new jersey transports petroleum products 13state market december 31 2008 company’s carrying value investment colonial pipeline approximately 560 higher amount underlying equity colonial pipeline net assets difference primarily relates purchase price adjustments acquisition unocal corporation chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc cpchem half owned conocophillips corporation dynegy inc 2007 chevron sold 19 percent common stock investment dynegy inc approximately 940 resulting gain 680 information “sales operating revenues” consolidated statement income includes 15390 11555 9582 affiliated companies 2008 2007 2006 respectively “purchased crude oil products” includes 6850 5464 4222 affiliated companies 2008 2007 2006 respectively “accounts notes receivable” consolidated balance sheet includes 701 1722 due affiliated companies december 31 2008 2007 respectively “accounts payable” includes 289 374 due affiliated companies december 31 2008 2007 respectively fs42 following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 2820 december 31 2008 note 13 properties plant equipment 1 net dry hole expense related prior years’ expenditures 55 89 120 2008 2007 2006 respectively depreciation expense includes accretion expense 430 399 275 2008 2007 2006 respectively 3 primarily mining operations power generation businesses real estate assets management information systems note 14 accounting buysell contracts company adopted accounting prescribed emerging issues task force eitf issue 0413 accounting purchases sales inventory counterparty issue 0413 prospective basis april 1 2006 issue 0413 requires two legally separate exchange transactions counterparty including buysell transactions combined considered single arrangement purposes applying provisions accounting principles board opinion 29 accounting nonmonetary transactions entered “in contemplation” one another prior periods company accounted buysell transactions consolidated statement income monetary transaction purchases reported “purchased crude oil products” sales reported “sales operating revenues” company’s adoption issue 0413 buysell transactions beginning second quarter 2006 netted consolidated statement income effect net income amount associated buysell transactions first quarter 2006 shown footnote consolidated statement income page fs27 fs43 note 15 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive october 2008 59 cases settled company party related use mtbe certain oxygenated gasolines alleged seepage mtbe groundwater terms agreement confidential material company’s results operations liquidity financial position chevron party 37 pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future settlement 59 lawsuits set precedents related standards liability used judge merits claims corrective measures required monetary damages assessed remaining lawsuits claims future lawsuits claims result company’s ultimate exposure related pending lawsuits claims currently determinable could material net income one period company longer uses mtbe manufacture gasoline united states rfg patent fourteen purported class actions brought consumers purchased reformulated gasoline rfg january 1995 august 2005 alleging unocal misled california air resources board adopting standards composition rfg overlapped unocal’s undisclosed pending patents parties agreed settlement calls among things unocal pay 48 establishment cy pres fund administer payout award court approved final settlement november 2008 ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively chevron third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations april 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 8000 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8300 could assessed chevron unjust enrichment engineer’s report binding court chevron also believes engineer’s work performed report prepared manner contrary law violation court’s orders chevron submitted rebuttal report asked court strike report entirety november 2008 engineer revised report without additional evidence recommended increase financial compensation purported damages total 18900 increase assessment purported unjust enrichment fs44 total 8400 chevron submitted rebuttal revised report chevron continue vigorous defense attempted imposition liability management believe estimate reasonably possible loss range loss made case due defects associated engineer’s report management believe report utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 16 taxes income taxes 2008 beforetax income us operations including related corporate charges 10682 compared beforetax income 7794 9131 2007 2006 respectively international operations beforetax income 32275 24373 22845 2008 2007 2006 respectively us federal income tax expense reduced 198 132 116 2008 2007 2006 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate explained table company’s effective tax rate increased 419 percent 2007 443 percent 2008 increase “effect income taxes international operations rates different us statutory rate” 83 percent 2007 102 percent 2008 mainly due greater proportion income earned 2008 tax jurisdictions higher tax rates addition 2007 period included relatively low tax rate sale downstream assets europe change “other” negative 18 percent negative 07 percent primarily related lower effective tax rate sale company’s investment dynegy common stock 2007 company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2008 increased approximately 1300 yearend 2007 increase primarily related increased temporary differences properties plant equipment deferred tax assets increased approximately 5300 2008 increase related primarily deferred credits recorded future tax benefits earned new field africa 2200 increased deferred tax benefits pensionrelated obligations 1300 additional foreign tax credits arising earnings hightaxrate international jurisdictions 1600 substantially offset valuation allowances overall valuation allowance relates foreign tax credit carryforwards tax loss carryforwards temporary differences benefit expected realized tax loss carryforwards exist many international jurisdictions whereas tax loss carryforwards expiration date others expire various times fs45 2009 2032 foreign tax credit carryforwards 4784 expire 2009 2018 december 31 2008 2007 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 22428 december 31 2008 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings intended reinvested indefinitely end 2008 deferred income taxes recorded undistributed earnings certain international operations company longer intends indefinitely reinvest earnings company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions financial accounting standards board fasb interpretation 48 accounting uncertainty income taxes interpretation fasb statement 109 fin 48 provides accounting guidance income tax benefits uncertain nature fin 48 company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” fin 48 refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits year ended december 31 2008 term “unrecognized tax benefits” fin 48 refers differences tax position taken expected taken tax return benefit measured recognized financial statements accordance guidelines fin 48 interest penalties included although unrecognized tax benefits individual tax positions may increase decrease 2009 company believes change individually significant 2009 approximately 85 percent 2696 unrecognized tax benefits december 31 2008 would impact effective tax rate subsequently recognized tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2008 jurisdictions latest years income tax examinations finalized follows united states 2003 nigeria 1994 angola 2001 saudi arabia 2003 consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2008 accruals 276 anticipated interest penalty obligations included consolidated balance sheet compared accruals 198 yearend 2007 income tax expense associated interest penalties 79 70 2008 2007 respectively fs46 taxes income note 17 shortterm debt weightedaverage interest rates december 31 2008 2007 067 percent 435 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders within one year following balance sheet date company periodically enters interest rate swaps portion shortterm debt see note 7 beginning page fs36 information concerning company’s debtrelated derivative activities december 31 2008 company 4950 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate bank prime rate amounts outstanding credit agreements 2008 yearend december 31 2008 2007 company classified 4950 4382 respectively shortterm debt longterm settlement obligations expected require use working capital 2009 company intent ability refinance debt longterm basis note 18 longterm debt total longterm debt excluding capital leases december 31 2008 5742 company’s longterm debt outstanding yearend 2008 2007 follows 1 guarantee esop debt 2 weightedaverage interest rate december 31 2008 longterm debt 1221 matures follows 2009 429 2010 64 2011 47 2012 33 2013 41 2013 607 2008 debt totaling 822 matured including 749 chevron canada funding company notes 2007 2000 chevron canada funding company bonds matured company also redeemed early 874 texaco capital inc bonds aftertax loss approximately 175 fs47 note 19 new accounting standards fasb statement 141 revised 2007 business combinations fas 141r december 2007 fasb issued fas 141r became effective business combination transactions acquisition date january 1 2009 standard requires acquiring entity business combination recognize assets acquired liabilities assumed noncontrolling interest acquiree acquisition date measured respective fair values also requires acquisitionrelated costs well restructuring costs acquirer expects incur obligated acquisition date recorded income rather included purchaseprice determination finally standard requires recognition contingent arrangements acquisitiondate fair values subsequent changes fair value generally reflected income fasb staff position fas 141ra accounting assets acquired liabilities assumed business combination fsp fas 141ra february 2009 fasb approved issuance fsp fas 141ra became effective business combinations acquisition date january 1 2009 standard requires asset liability arising contingency business combination recognized fair value fair value reasonably determined cannot reasonably determined asset liability need recognized accordance fasb statement 5 accounting contingencies fasb interpretation 14 reasonable estimation amount loss fasb statement 160 noncontrolling interests consolidated financial statements amendment arb 51 fas 160 fasb issued fas 160 december 2007 became effective company january 1 2009 retroactive adoption standard’s presentation disclosure requirements existing minority interests standard requires ownership interests subsidiaries held parties parent presented within equity section consolidated balance sheet separate parent’s equity also requires amount consolidated net income attributable parent noncontrolling interest clearly identified presented face consolidated statement income certain changes parent’s ownership interest accounted equity transactions subsidiary deconsolidated noncontrolling equity investment former subsidiary initially measured fair value implementation fas 160 significantly change presentation company’s consolidated statement income consolidated balance sheet fasb statement 161 disclosures derivative instruments hedging activities fas 161 march 2008 fasb issued fas 161 became effective company january 1 2009 standard amends expands disclosure requirements fasb statement 133 accounting derivative instruments hedging activities fas 161 requires disclosures related objectives strategies using derivatives fairvalue amounts gains losses derivative instruments creditriskrelated contingent features derivative agreements company’s disclosures derivative instruments expanded include tabular representation location fair value amounts derivative instruments balance sheet fair value gains losses income statement gains losses associated cash flow hedges recognized earnings comprehensive income fasb staff position fas 132r1 employer’s disclosures postretirement benefit plan assets fsp fas 132r1 december 2008 fasb issued fsp fas 132r1 becomes effective company’s reporting december 31 2009 standard amends expands disclosure requirements plan assets defined benefit pension postretirement plans provide users financial statements understanding investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fairvalue measurements using significant unobservable inputs changes plan assets period significant concentrations risk within plan assets company prefund postretirement plan obligations effect company’s disclosures pension plan assets result adoption fsp fas 132r1 depend company’s plan assets time note 20 accounting suspended exploratory wells company accounts cost exploratory wells accordance fasb statement 19 financial reporting oil gas producing companies fas 19 amended fasb staff position fsp fas 191 accounting suspended well costs provides exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b enterprise making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fs48 fas 19 provides number indicators assist entity demonstrate sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2008 represent property sales exchanges following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 1559 exploratory well costs capitalized one year december 31 2008 874 27 projects related projects drilling activities way firmly planned near future additional 279 four projects related projects drilling activity 2008 406 balance related 19 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 406 referenced following activities associated assessing reserves projects’ economic viability 107 two projects government approval plan development received fourth quarter 2008 b 73 two projects continued unitization efforts adjacent discoveries span international boundaries c 49 one project alignment project stakeholders regarding scope commercial strategy 46 one project subsurface facilities engineering studies ongoing frontendengineering design expected late 2009 e 40 one project continued review development options f 91 miscellaneous activities 12 projects smaller amounts suspended progress made 50 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 1559 suspended well costs capitalized period greater one year december 31 2008 represents 195 exploratory wells 50 projects tables contain aging costs well project basis note 21 stock options sharebased compensation expense stock options 2008 2007 2006 168 109 tax 146 95 tax 125 81 tax respectively addition compensation expense stock appreciation rights performance units restricted stock units 132 86 tax 205 133 tax 113 73 tax 2008 2007 2006 respectively significant stockbased compensation cost capitalized december 31 2008 2007 cash received payment option exercises sharebased payment arrangements 2008 2007 2006 404 445 444 respectively actual tax benefits realized tax deductions option exercises 103 94 91 2008 2007 2006 respectively fs49 cash paid settle performance units stock appreciation rights 136 88 68 2008 2007 2006 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options 10year contractual lives extending 2011 retained provision restored provision enables participant exercises stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted beginning 2007 restored options granted ltip awards may granted former texaco plans unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans exercised awards expire early 2009 early 2015 fair market values stock options stock appreciation rights granted 2008 2007 2006 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2008 presented total intrinsic value ie difference exercise price market price options exercised 2008 2007 2006 433 423 281 respectively period company continued practice issuing treasury shares upon exercise awards fs50 december 31 2008 179 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period 19 years january 1 2008 number ltip performance units outstanding equivalent 2225015 shares 2008 888300 units granted 652897 units vested cash proceeds distributed recipients 59863 units forfeited december 31 2008 units outstanding 2400555 fair value liability recorded instruments 201 addition outstanding stock appreciation rights awards granted various ltip former texaco unocal programs totaled approximately 14 million equivalent shares december 31 2008 liability 35 recorded awards broadbased employee stock options addition plans described chevron granted eligible employees stock options equivalents 1998 options vested february 2000 expired february 2008 total 9641600 options awarded exercise price 3816 per share fair value option date grant estimated 954 using blackscholes model preceding 10 years assumptions used model based 10year average riskfree interest rate 7 percent dividend yield 42 percent expected life seven years volatility 247 percent january 1 2008 number broadbased employee stock options outstanding 652715 conclusion program february 2008 396875 shares exercised 255840 shares forfeited total intrinsic value options exercised 2008 2007 2006 18 30 10 respectively note 22 employee benefit plans company definedbenefit pension plans many employees company typically prefunds definedbenefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent per year certain life insurance benefits paid company effective december 31 2006 company implemented recognition measurement provisions financial accounting standards board fasb statement 158 employers’ accounting defined benefit pension postretirement plans amendment fasb statements 87 88 106 132r requires recognition overfunded underfunded status defined benefit pension opeb asset liability offset “accumulated comprehensive loss” funded status company’s pension postretirement benefit plans 2008 2007 following page fs51 amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2008 2007 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb postretirement plans 5831 2990 end 2008 2007 amounts consisted accumulated benefit obligations us international pension plans 7376 3273 respectively december 31 2008 7712 4000 respectively december 31 2007 information us international pension plans accumulated benefit obligation excess plan assets december 31 2008 2007 fs52 components net periodic benefit cost 2008 2007 2006 amounts recognized comprehensive income 2008 2007 shown table 2008 2007 changes pension plan assets benefit obligations recognized changes comprehensive income net actuarial losses recorded “accumulated comprehensive loss” december 31 2008 company’s us pension international pension opeb plans amortized straightline basis approximately 10 13 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2009 company estimates actuarial losses 298 103 28 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 201 recognized “accumulated comprehensive loss” 2009 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2008 approximately nine 13 years us international pension plans respectively eight years postretirement benefit plans 2009 company estimates prior service credits costs 7 25 81 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs53 assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 1 2006 us discount rate reflects remeasurement july 1 2006 due plan combinations changes primarily several unocal plans related chevron plans expected return plan assets company’s estimated longterm rate return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 68 percent company’s pension plan assets december 31 2008 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2008 company selected 63 percent discount rate major us pension postretirement plans rate based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2008 discount rates end 2007 2006 63 percent 58 percent respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2008 main us postretirement medical plan assumed health care costtrend rates start 7 percent 2009 gradually decline 5 percent 2017 beyond measurement december 31 2007 assumed health care costtrend rates started 8 percent 2008 gradually declined 5 percent 2014 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy company’s pension plan weightedaverage asset allocations december 31 asset category follows fs54 pension plans invest primarily asset categories sufficient size liquidity cost efficiency permit investments reasonable size pension plans invest asset categories provide diversification benefits easily measured assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors approved following percentage assetallocation ranges equities 4070 fixed incomecash 2060 real estate 015 05 significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset category risk equities include investments company’s common stock amount 22 36 december 31 2008 2007 respectively “other” asset category includes minimal investments privateequity limited partnerships cash contributions benefit payments 2008 company contributed 577 262 us international pension plans respectively 2009 company expects contributions approximately 550 250 us international pension plans respectively actual contribution amounts dependent upon planinvestment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 209 2009 compared 188 paid 2008 following benefit payments include estimated future service expected paid next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop follows total company matching contributions employee accounts within esip 231 206 169 2008 2007 2006 respectively cost reduced value shares released lesop totaling 40 33 6 2008 2007 2006 respectively remaining amounts totaling 191 173 163 2008 2007 2006 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted american institute certified public accountants aicpa statement position 936 employers’ accounting employee stock ownership plans company elected continue practices based aicpa statement position 763 accounting practices certain employee stock ownership plans subsequent consensus eitf fasb debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement stockholders’ equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations net credit expense 1 recorded lesop year 2008 2007 2006 net credit respective years composed credits compensation expense 15 17 18 charges interest expense lesop debt 14 16 17 dividends paid lesop shares 35 8 59 used 2008 2007 2006 respectively service lesop debt amount 2006 included 28 lesop debt service scheduled payment first business day january 2007 paid late december 2006 contributions required 2008 2007 2006 dividends received lesop sufficient satisfy lesop debt service fs55 shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total current year remaining debt service lesop shares december 31 2008 2007 follows benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2008 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2008 2007 trust assets 60 69 respectively invested primarily interestearning accounts employee incentive plans effective january 2008 company established chevron incentive plan cip single annual cash bonus plan eligible employees links awards corporate unit individual performance prior year plan replaced cash bonus programs primarily included management incentive plan mip chevron success sharing program 2008 charges expense cash bonuses 757 charges expense mip 184 180 2007 2006 respectively charges cash bonus programs 431 329 2007 2006 respectively chevron also longterm incentive plan ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 21 page fs49 note 23 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 16 beginning page fs45 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity guarantees company issued guarantee approximately 600 associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduce time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron carries liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 end 2008 company paid 48 indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims must asserted later february 2009 equilon indemnities later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments february 2009 shell delivered letter company purporting preserve unmatured claims certain equilon indemnities letter provides estimate ultimate claim amount management believe letter provides basis estimate amount range loss potential range loss respect equilon motiva indemnities company posts assets collateral made payments indemnities fs56 amounts payable indemnities described previous page net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 indemnification agreement company’s liability unlimited april 2022 indemnification expires acquirer shares certain environmental remediation costs maximum obligation 200 reached december 31 2008 securitization 2008 company terminated program used securitize downstreamrelated trade accounts receivable yearend 2007 balance securitized receivables 675 million december 31 2008 company securitization arrangements place longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2009 6405 2010 3964 2011 3578 2012 1473 2013 1329 2014 4333 portion commitments may ultimately shared project partners total payments agreements approximately 5100 2008 3700 2007 3000 2006 minority interests company commitments 469 related minority interests subsidiary companies environmental company subject loss contingencies pursuant environmental laws regulations future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2008 1818 included balance remediation activities 248 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2008 120 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2008 environmental reserves balance 1698 968 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 730 associated various sites international downstream 117 upstream 390 chemicals 154 businesses 69 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2008 recorded liability material company’s results operations consolidated financial position liquidity fs57 likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 24 discussion company’s asset retirement obligations equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 possible maximum net amount could owed chevron estimated 150 timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 24 asset retirement obligations company accounts asset retirement obligations aro accordance financial accounting standards board fasb statement 143 accounting asset retirement obligations fas 143 fasb interpretation 47 accounting conditional asset retirement obligations interpretation fasb statement 143 fin 47 fas 143 applies fair value liability aro recorded legal obligation associated retirement tangible longlived asset liability reasonably estimated obligations associated retirement assets require recognition certain circumstances 1 present value liability offsetting asset aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates fin 47 clarifies phrase “conditional asset retirement obligation” used fas 143 refers legal obligation perform asset retirement activity timing andor method settlement conditional future event may within control company obligation perform asset retirement activity unconditional even though uncertainty exists timing andor method settlement uncertainty timing andor method settlement conditional aro factored measurement liability sufficient information exists fas 143 acknowledges cases sufficient information may available reasonably estimate fair value aro fin 47 also clarifies entity would sufficient information reasonably estimate fair value aro fas 143 fin 47 primarily affect company’s accounting crude oil natural gas producing assets significant aros associated legal obligations retire refining marketing transportation downstream chemical longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2008 2007 2006 includes 175 revision aro liability retained properties sold table amounts associated “revisions estimated cash flows” reflect increasing costs abandon onshore offshore wells equipment facilities including aggregate 1804 2006 2008 estimated costs dismantle abandon wells facilities damaged hurricanes us gulf mexico 2005 2008 longterm portion 9395 balance end 2008 8588 fs58 note 25 financial information net income 2008 included gains approximately 1200 relating sale nonstrategic properties amount approximately 1000 related upstream assets net income 2007 included gains approximately 2000 relating sale nonstrategic properties amount approximately 1100 related downstream assets 680 related sale company’s investment dynegy inc financial information follows excess replacement cost carrying value inventories lastin firstout lifo method used 9368 6958 december 31 2008 2007 respectively replacement cost generally based average acquisition costs year lifo profits 210 113 82 included net income years 2008 2007 2006 respectively note 26 assets held sale december 31 2008 company classified 252 net properties plant equipment “assets held sale” consolidated balance sheet assets category related groups service stations aviation facilities lubricants blending plants commercial industrial fuels business assets anticipated sold 2009 note 27 earnings per share basic earnings per share eps based upon net income less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 21 “stock options sharebased compensation” beginning page fs49 table sets forth computation basic diluted eps fs59 page intentionally left blank fs60 fiveyear financial summary unaudited fs61 accordance fas 69 disclosures oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally nigeria angola chad republic congo democratic republic congo asiapacific table costs incurred exploration property acquisitions development1 fs62 geographic area includes activities principally australia azerbaijan bangladesh china kazakhstan myanmar partitioned neutral zone kuwait saudi arabia philippines thailand international “other” geographic category includes activities argentina brazil canada colombia denmark netherlands norway trinidad tobago venezuela united kingdom countries amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies “other” amounts composed company’s equity interests venezuela angola russia refer note 12 beginning page fs41 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs63 fs64 company’s results operations oil gas producing activities years 2008 2007 2006 shown following table net income exploration production activities reported page fs39 reflects income taxes computed effective rate basis accordance fas 69 income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs39 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” beginning page fs58 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements includes 10 costs incurred prior assignment proved reserves 2007 fs65 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” beginning page fs58 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs66 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved reserves estimated quantities geologic engineering data demonstrate reasonable certainty recoverable future years known reservoirs existing economic operating conditions net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly executive vice president responsible company’s worldwide exploration production activities rac members knowledgeable sec guidelines proved reserves classification rac coordinates activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities provide independent reviews business units’ recommended reserve changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves fs67 year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee executive committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination provedreserve records documentation alignment corporate reserves manual modernization oil gas reporting december 2008 sec issued final rule modernization oil gas reporting release nos 338995 3459192 fr78 disclosure requirements final rule become effective company form 10k filing year ending december 31 2009 final rule changes number oil gas reserve estimation disclosure requirements sec regulations sk sx among principal changes final rule requirements use price based 12month average reserve estimation disclosure instead single endofyear price expanding definition oil gas producing activities include nontraditional sources bitumen extracted oil sands permitting use new reliable technologies establish reasonable certainty proved reserves allowing optional disclosure probable possible reserves modifying definition geographic area disclosure reserve estimates production amending disclosures proved reserve quantities include separate disclosures synthetic oil gas expanding proved undeveloped reserve disclosures puds including discussion puds five years old disclosure qualifications chief technical person oversees company’s overall reserves estimation process reserve quantities december 31 2008 oilequivalent reserves company’s consolidated operations 79 billion barrels refer term “reserves” page e147 definition oilequivalent reserves approximately 25 percent total reserves united states company’s interests equity affiliates oilequivalent reserves 33 billion barrels 82 percent associated company’s 50 percent ownership tco aside tengiz field tco affiliate single property accounted 5 percent company’s total oilequivalent proved reserves 20 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted approximately 40 percent company’s total proved reserves properties geographically dispersed located united states south america west africa middle east asiapacific region united states total oilequivalent reserves yearend 2008 20 billion barrels amount 43 percent 22 percent 35 percent located california gulf mexico us areas respectively california liquids reserves represented 94 percent total classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region liquids represented approximately 66 percent total oilequivalent reserves production operations mostly offshore result also capital intensive costs include investments wells production platforms facilities gathering lines storage facilities us areas reserves split equally liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection pattern net reserve changes shown following tables three years ending december 31 2008 necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans declines oil gas prices opec constraints geopolitical uncertainties civil unrest upward revision thailand reflected additional drilling development activity year upward revisions partially offset reductions reservoir performance nigeria united kingdom decreased reserves 43 million barrels 32 million barrels respectively upward revision affiliated companies related 60 millionbarrel increase tco result improved reservoir performance 2007 net revisions decreased reserves 146 million barrels worldwide consolidated companies increased reserves 103 million barrels equity affiliates consolidated companies largest downward net revisions 89 million barrels africa 66 million barrels indonesia company’s estimated net proved oil natural gas reserves changes thereto years 2006 2007 2008 shown tables pages fs69 fs71 fs68 net proved reserves crude oil condensate natural gas liquids information canadian oil sands net proved reserves included addition conventional liquids natural gas proved reserves chevron 20 percent nonoperated working interest athabasca oilsands project canada yearend 2008 sec regulations defined oilsands reserves miningrelated part conventional oil gas reserves net proved oilsands reserves 436 million 443 million december 31 2007 2006 respectively oilsands quantities classified proved reserves end 2008 provisions sec industry guide 7 description property issuers engaged significant mining operations mineral deposit must economically producible time reserve determination order classified proved due decline crudeoil prices end 2008 operating costs athabasca project exceeded revenues crudeoil sales time inability classify oilsands volumes proved end 2008 affect daily operations athabasca project activities way expand operations 2008 bitumen production project averaged 126000 barrels per day 27000 net expansion project designed increase production capacity 255000 barrels per day late 2010 oilsands proved reserves 2007 2006 included standardized measure discounted future net cash flows conventional oil gas reserves page fs73 noteworthy amounts categories liquids provedreserve changes 2006 2008 discussed revisions 2006 net revisions increased reserves 39 million 84 million barrels worldwide consolidated companies equity affiliates respectively international consolidated companies accounted net increase 39 million barrels largest upward net revisions 61 mil lion barrels indonesia 27 million barrels thailand indonesia increase result infill drilling improved steamflood waterflood performance africa decrease mainly based field performance data fields nigeria effect higher yearend prices angola republic congo indonesia decline also reflected impact higher fs69 yearend prices higher prices also resulted downward revisions karachaganak azerbaijan equity affiliates upward revision related 92 millionbarrel increase tco’s tengiz field 11 millionbarrel increase petroboscan venezuela result improved reservoir performance tco upward revision tempered negative impact higher yearend prices 2008 net revisions increased reserves 536 million barrels worldwide consolidated companies increased reserves 267 million barrels equity affiliates consolidated companies international areas added 552 million barrels largest increase asiapacific region added 384 million barrels majority increase partitioned neutral zone result concession extension upward revisions also recorded kazakhstan azerbaijan mainly associated effect lower yearend prices calculation reserves associated productionsharing variableroyalty contracts indonesia reserves increased 191 million barrels due mainly impact lower yearend prices reserve calculations productionsharing contracts well result development drilling improved waterflood steamflood performance affiliate companies 249 millionbarrel increase tco due effect lower yearend prices royalty determination facility optimization tengiz korolev fields improved recovery 2006 improved recovery increased liquids volumes worldwide 83 million barrels consolidated companies reserves united states increased 52 million barrels california representing 49 million barrels total increase due steamflood expansion revised modeling activities internationally improved recovery increased reserves 31 million barrels single country accounting increase 10 million barrels 2007 improved recovery increased liquids volumes 20 million barrels worldwide addition individually significant 2008 improved recovery increased worldwide liquids volumes 37 million barrels international consolidated companies accounted 22 million barrels united states accounted 5 million barrels largest addition related gas reinjection kazakhstan affiliated companies increased reserves 10 million barrels due improved secondary recovery boscan extensions discoveries 2006 extensions discoveries increased liquids volumes worldwide 107 million barrels consolidated companies reserves nigeria increased 27 million barrels due part initial booking reserves aparo field additional drilling activities contributed 19 million barrels united kingdom 14 million barrels argentina united states gulf mexico added 25 million barrels mainly result initial booking great white field deepwater perdido fold belt area 2007 extensions discoveries increased liquids volumes 60 million barrels worldwide largest additions 25 million barrels us gulf mexico mainly deepwater tahiti mad dog fields 2008 extensions discoveries increased consolidated company reserves 33 million barrels worldwide united states increased reserves 17 million barrels primarily gulf mexico international companies increased reserves 16 million barrels one country resulting additions greater 5 million barrels purchases 2006 acquisitions increased liquids volumes worldwide 21 million barrels consolidated companies 119 million barrels equity affiliates consolidated companies amount mainly result new agreements nigeria added 13 million barrels reserves otherequityaffiliates quantity reflects result conversion boscan ll652 operations joint stock companies venezuela 2007 acquisitions 316 million barrels equity affiliates related formation new hamaca equity affiliate venezuela sales 2006 sales decreased reserves 15 million barrels due conversion ll652 risked service agreement joint stock company venezuela 2007 affiliated company sales 432 million barrels related dissolution hamaca equity affiliate venezuela fs70 net proved reserves natural gas noteworthy amounts categories natural gas provedreserve changes 2006 2008 discussed revisions 2006 revisions accounted net increase 481 billion cubic feet bcf consolidated companies 26 bcf affiliates consolidated companies net increases 511 bcf internationally partially offset 30 bcf downward revision united states drilling development activities added 337 bcf reserves thailand kazakhstan added 200 bcf largely due development activity trinidad tobago increased 185 bcf attributable improved reservoir performance new contract sales natural gas additions partially offset downward revisions 224 bcf united kingdom 130 bcf australia due drilling results reservoir performance us “other” downward revision 102 bcf due reservoir performance partially offset upward revisions 72 bcf gulf mexico california related reservoir performance development drilling tco upward revision 26 bcf associated additional development activity updated reservoir performance 2007 revisions increased reserves consolidated companies net 395 bcf increased reserves affili fs71 ated companies net 73 bcf consolidated companies net increases 209 bcf united states 186 bcf internationally improved reservoir performance many fields united states contributed 130 bcf “other” region 40 bcf california 39 bcf gulf mexico drilling activities added 360 bcf thailand improved reservoir performance added 188 bcf trinidad tobago additions partially offset downward revisions 185 bcf australia due drilling results 136 bcf nigeria due field performance negative revisions due impact higher prices recorded azerbaijan kazakhstan tco upward revision 75 bcf associated improved reservoir performance development activities upward revision net negative impact due higher yearend prices 2008 revisions increased reserves consolidated companies net 1166 bcf increased reserves affiliated companies 1130 bcf asiapacific region positive revisions totaled 961 bcf consolidated companies almost half increase attributed karachaganak field kazakhstan due mainly effects low yearend prices productionsharing contract results development drilling improved recovery large upward revisions recorded pattani field thailand due successful drilling campaign tco affiliate kazakhstan increase 498 bcf reflected impacts lower yearend prices royalty determination facility optimization reserves associated angola lng project accounted majority 632 bcf increase “other” affiliated companies extensions discoveries 2006 extensions discoveries accounted increase 799 bcf consolidated companies reflecting 531 bcf increase outside united states us increase 268 bcf bangladesh added 451 bcf result development activity field extensions thailand added 59 bcf result drilling activities us “other” contributed 157 bcf approximately half related south texas piceance basin gulf mexico added 111 bcf partly due initial booking reserves great white field deepwater perdido fold belt area 2007 extensions discoveries accounted increase 518 bcf worldwide largest addition 330 bcf bangladesh result drilling activities additions individually significant purchases 2006 purchases natural gas reserves 35 bcf consolidated companies evenly divided company’s us international operations affiliated companies added 54 bcf reserves result conversion operating service agreement joint stock company venezuela 2007 purchases natural gas reserves 141 bcf consolidated companies include acquisition additional interest bibiyana field bangladesh affiliated company purchases 211 bcf related formation new hamaca equity affiliate venezuela initial booking related angola lng project sales 2006 sales consolidated companies totaled 149 bcf mostly associated conversion risked service agreement joint stock company venezuela 2007 sales 76 bcf 175 bcf consolidated companies equity affiliates respectively affiliated company sales related dissolution hamaca equity affiliate venezuela table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fas 69 estimated future cash inflows production computed applying yearend prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fas 69 requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs72 fs73 changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs74 exhibit index e1 filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules schedule valuation qualifying accounts disclosure schedule ii valuation qualifying accounts millions dollars see also note 15 consolidated financial statements beginning page fs46 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 25th day february 2010 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 25th day february 2010 financial table contents fs2 management’s discussion analysis financial condition results operations key financial results fs2 earnings major operating area fs2 business environment outlook fs2 operating developments fs5 results operations fs6 consolidated statement income fs9 selected operating data fs10 liquidity capital resources fs11 financial ratios fs12 guarantees offbalancesheet arrangements contractual obligations contingencies fs13 financial derivative instruments fs14 transactions related parties fs15 litigation contingencies fs15 environmental matters fs18 critical accounting estimates assumptions fs18 new accounting standards fs21 quarterly results stock market data fs24 fs25 consolidated financial statements report management fs25 report independent registered public accounting firm fs26 consolidated statement income fs27 consolidated statement comprehensive income fs28 consolidated balance sheet fs29 consolidated statement cash flows fs30 consolidated statement equity fs31 fs32 fs1 management’s discussion analysis financial condition results operations key financial results earnings major operating area 2 also referred “earnings” discussions follow refer “results operations” section beginning page fs6 discussion financial results major operating area three years ended december 31 2009 business environment outlook chevron global energy company significant business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark indonesia kazakhstan myanmar netherlands nigeria norway partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend largely profitability upstream exploration production downstream refining marketing transportation business segments single biggest factor affects results operations segments movement price crude oil downstream business crude oil largest cost component refined products overall trend earnings typically less affected results company’s chemicals business activities investments earnings company period may also influenced events transactions infrequent unusual nature company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries sustain longterm competitive position upstream business company must develop replenish inventory projects offer attractive financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments time certain governments sought renegotiate contracts impose additional costs company governments may attempt future company continue monitor developments take account evaluating future investment opportunities otherwise seek mitigate risks company’s current operations future prospects company also continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning fs6 discussions net gains asset sales 2009 asset dispositions restructurings may also occur future periods could result significant gains losses recent years chevron oil gas industry large experienced increase certain costs exceeded general trend inflation many areas world increase costs affected company’s operating expenses capital programs business segments particularly upstream softening cost pressures started late 2008 continued 2009 costs began level fourth quarter 2009 company continues actively manage schedule work fs2 contracting procurement supplychain activities effectively manage costs refer “upstream” section discussion trend crudeoil prices company continues closely monitor developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management taking developments account conduct daily operations business planning company remains confident underlying financial strength address potential challenges presented environment refer also “liquidity capital resources” section beginning fs11 comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crudeoil naturalgas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments attempts manage risks operating facilities businesses besides impact fluctuation prices crude oil natural gas longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations price levels capital exploratory costs operating expenses associated production crude oil natural gas also subject external factors beyond company’s control external factors include general level inflation also commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest chart left shows trend benchmark prices west texas intermediate wti crude oil us henry hub natural gas industry price levels crude oil continued volatile 2009 prices wti ranging 34 81 per barrel wti price averaged 62 per barrel fullyear 2009 compared 100 2008 decline prices 2008 largely associated weakening global economic conditions reduction demand crude oil petroleum products midfebruary 2010 wti price 77 differential crudeoil prices exists highquality highgravity lowsulfur crudes lowerquality lowgravity highsulfur amount differential period associated supply heavy crude available versus demand function number refineries able process lowerquality feedstock light products motor gasoline jet fuel aviation gasoline diesel fuel differential remained narrow 2009 production declines industry mainly lowerquality crudes chevron produces shares production heavy crude oil california chad indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom fs3 management’s discussion analysis financial condition results operations sector north sea see page fs10 company’s average us international crudeoil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets united states prices henry hub averaged 380 per thousand cubic feet mcf 2009 compared almost 9 2008 december 31 2009 midfebruary 2010 henry hub spot price 570 550 per mcf respectively fluctuations price natural gas united states closely associated customer demand relative volumes produced north america level inventory underground storage weaker us demand 2009 associated economic slowdown certain international naturalgas markets company operates different supply demand regulatory circumstances historically resulted lower average sales prices company’s production natural gas locations chevron continues invest longterm projects locations install infrastructure produce liquefy natural gas transport tanker markets greater demand results higher prices international naturalgas realizations averaged 400 per mcf 2009 compared 520 per mcf 2008 unlike prior years realizations compared favorably united states 2009 primarily result deterioration us supplyanddemand conditions resulting economic slowdown see page fs10 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2009 averaged 270 million barrels per day onefifth company’s net oilequivalent production 2009 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait year 2009 company’s net oil production reduced average 20000 barrels per day due quotas imposed opec imposed curtailments took place first half year december 2009 meeting members opec supported maintaining production quotas effect since december 2008 company estimates oilequivalent production 2010 average approximately 273 million barrels per day estimate subject many factors uncertainties including additional quotas may imposed opec price effects production volumes calculated costrecovery variableroyalty provisions certain contracts changes fiscal terms restrictions scope company operations delays project startups fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crudeoil naturalgas production significant majority chevron’s upstream investment made outside united states refer “results operations” section pages fs6 fs7 additional discussion company’s upstream business refer table v beginning page fs69 tabulation company’s proved net oil gas reserves geographic area beginning 2007 yearend 2007 2009 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2009 downstream earnings downstream segment closely tied margins refining marketing products include gasoline diesel jet fuel lubricants fuel oil feedstocks chemical manufacturing industry margins sometimes volatile affected global regional supplyanddemand balance refined products changes price crude oil used refinery feedstock industry margins also influenced refinedproduct inventory levels geopolitical events cost materials services refinery maintenance programs disruptions refineries resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing network effectiveness crudeoil productsupply functions profitability also affected volatility tankercharter rates company’s shipping operations driven industry’s demand crudeoil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refinery distribution network company’s significant marketing areas west coast north america us gulf coast latin america asia southern africa united kingdom chevron operates significant ownership interests refineries areas except latin america company completed sales marketing businesses 2009 certain countries latin america africa company plans discontinue mid2010 sales chevron texacobranded motor fuels midatlantic eastern states company sold retail customers approximately 1100 stations commercial industrial customers supply arrangements sales markets fs4 represent approximately 8 percent company’s total us retail fuel sales volumes additionally january 2010 company sold rights gulf trademark united states territories previously licensed use us northeast puerto rico company’s refining marketing margins 2009 generally weak due challenging industry conditions including sharp drop global demand reflecting economic slowdown excess refinedproduct supplies surplus refining capacity given conditions january 2010 company announced employees highlevel evaluations chevron’s refining marketing organizations completed evaluations concluded company’s downstream organization restructured improve operating efficiency achieve sustained improvement financial performance details restructuring developed next three six months may include exits additional markets dispositions assets reductions number employees actions may result gains losses future periods refer “results operations” section pages fs7 fs8 additional discussion company’s downstream operations chemicals earnings petrochemicals business closely tied global chemical demand industry inventory levels plant capacity utilization feedstock fuel costs tend follow crudeoil naturalgas price movements also influence earnings segment refer “results operations” section page fs8 additional discussion chemical earnings operating developments key operating developments events 2009 early 2010 included following upstream angola production began 392 percentowned operated mafumeira norte offshore project block 0 31 percentowned operated deepwater tombualandana project block 14 mafumeira norte expected reach maximum total daily production 42000 barrels crude oil third quarter 2010 tombualandana project expected reach maximum total production approximately 100000 barrels crude oil per day 2011 company also discovered crude oil offshore 392 percentowned operated block 0 concession extending trend earlier discoveries greater vanzalongui area australia company partners reached final investment decision proceed development gorgon project located offshore western australia chevron 473 percentowned operated interest december 31 2009 addition company finalized longterm sales agreements delivery liquefied natural gas lng gorgon project four asian customers three also acquired ownership interest project nonbinding heads agreement hoas three additional asian customers also signed late 2009 early 2010 delivery lng project negotiations continue finalize binding sales agreements would bring lng delivery commitments combined total 90 percent chevron’s share lng project company awarded frontend engineering design contracts first phase wheatstone natural gas project also located offshore northwest australia 75 percentowned operated facilities lng processing capacity 86 million metric tons per year colocated domestic naturalgas plant facilities support development chevron’s interests wheatstone field nearby iago field agreements signed two companies join wheatstone project combined 25 percent owners suppliers natural gas project’s first two lng trains addition nonbinding hoas signed two asian customers take delivery 49 million metric tons per year lng project 60 percent total lng available foundation project acquire 168 percent equity interest wheatstone field licenses 126 percent interest foundation natural gas processing facilities final investment decision may 2009 company announced successful completion well clio prospect explore appraise 667 percentowned block wa205p 2009 early 2010 company also announced naturalgas discoveries kentish knock prospect 50 percentowned block wa365p achilles satyr prospects 50 percentowned block wa374p yellowglen prospect 50 percentowned wa268p block prospects chevronoperated proved reserves recognized discoveries brazil production started 517 percentowned operated deepwater frade field projected attain maximum total production 72000 oilequivalent barrels per day 2011 also early 2010 final investment decision reached develop 375 percentowned partneroperated papaterra field first production expected 2013 project facilities designed capacity handle 140000 barrels crude oil per day republic congo crude oil discovered northern portion 315 percentowned partneroperated mohobilondo deepwater permit area discovery follows two others made 2007 permit area fs5 management’s discussion analysis financial condition results operations venezuela february 2010 chevronled consortium named operator heavyoil project composed three blocks orinoco oil belt eastern venezuela united states first oil achieved 58 percentowned operated tahiti field deepwater gulf mexico reaching maximum total production 135000 barrels oilequivalent per day company also discovered crude oil chevronoperated 55 percentowned buckskin prospect deepwater gulf mexico first appraisal well scheduled begin drilling second quarter 2010 downstream company sold businesses 2009 brazil haiti nigeria benin cameroon republic congo côte d’ivoire togo kenya uganda india italy peru chile common stock dividends quarterly common stock dividend increased 46 percent july 2009 068 per share 2009 22nd consecutive year company increased annual dividend payment common stock repurchase program company acquire shares 2009 15 billion repurchase program began 2007 expires september 2010 december 31 2009 119 million common shares acquired program 101 billion results operations major operating areas following section presents results operations company’s business segments upstream downstream chemicals well “all other” includes mining power generation businesses various companies departments managed corporate level company’s investment dynegy prior sale may 2007 earnings also presented us international geographic areas upstream downstream business segments refer note 11 beginning page fs40 discussion company’s “reportable segments” defined accounting standards segment reporting accounting standards codification asc 280 section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream exploration production us upstream earnings 22 billion 2009 decreased 49 billion 2008 lower prices crude oil natural gas reduced earnings 52 billion periods gains asset sales declined approximately 900 million partially offsetting effects benefit 13 billion resulting increase net oilequivalent production approximate 600 million benefit income lower operating expenses offset higher depreciation expense benefit lower operating expenses largely associated absence charges damages related 2008 hurricanes gulf mexico us upstream earnings 71 billion 2008 increased 26 billion 2007 higher average prices crude oil natural gas increased earnings 31 billion periods also contributing higher earnings gains approximately 1 billion asset sales including 600 million gain assetexchange transaction partially offsetting benefits adverse effects 16 billion associated lower oilequivalent production higher operating expenses included approximately 400 million expenses resulting damage facilities gulf mexico caused hurricanes company’s average realization crude oil natural gas liquids 2009 5436 per barrel compared 8843 2008 6316 2007 average naturalgas realization 373 per thousand cubic feet 2009 compared 790 612 2008 2007 respectively fs6 net oilequivalent production 2009 averaged 717000 barrels per day 69 percent 2008 35 percent 2007 increase 2008 2009 mainly due startup blind faith field late 2008 tahiti field second quarter 2009 decrease 2007 2008 mainly due normal field declines adverse impact hurricanes net liquids component oilequivalent production 2009 averaged 484000 barrels per day approximately 15 percent 2008 5 percent compared 2007 net naturalgas production averaged 14 billion cubic feet per day 2009 approximately 7 percent 2008 18 percent 2007 refer “selected operating data” table page fs10 threeyear comparative production volumes united states international upstream exploration production international upstream earnings 82 billion 2009 decreased 64 billion 2008 lower prices crude oil natural gas reduced earnings 70 billion foreigncurrency effects higher operating depreciation expenses decreased income total 22 billion partially offsetting items benefits 23 billion resulting increase sales volumes crude oil 500 million associated asset sales tax items related gorgon project australia earnings 146 billion 2008 increased 43 billion 2007 higher prices crude oil natural gas increased earnings 49 billion partially offsetting benefit higher prices impact 18 billion associated reduction crudeoil sales volumes due timing certain cargo liftings higher depreciation operating expenses foreigncurrency effects benefited earnings 873 million 2008 compared reduction earnings 417 million 2007 company’s average realization crude oil natural gas liquids 2009 5597 per barrel compared 8651 2008 6501 2007 average naturalgas realization 401 per thousand cubic feet 2009 compared 519 390 2008 2007 respectively net oilequivalent production 199 million barrels per day 2009 increased 7 percent 6 percent 2008 2007 respectively volumes year included production oil sands canada absent impact prices certain productionsharing variableroyalty agreements net oilequivalent production increased 4 percent 2009 3 percent 2008 compared prior years’ production net liquids component oilequivalent production 14 million barrels per day 2009 increase approximately 11 percent 2008 5 percent 2007 net naturalgas production 36 billion cubic feet per day 2009 1 percent 8 percent 2008 2007 respectively refer “selected operating data” table page fs10 threeyear comparative international production volumes us downstream refining marketing transportation us downstream operations lost 273 million 2009 earnings decrease approximately 16 billion 2008 decline refined product margins resulted negative earnings variance 17 billion partially offsetting lower operating expenses benefited earnings 300 million earnings 14 billion 2008 increased 400 million 2007 due mainly improved margins sale refined products gains derivative commodity instruments operating expenses higher 2007 2008 sales volumes refined products 140 million barrels per day 2009 decrease 1 percent 2008 decline associated reduced demand jet fuel oil principally associated downturn us economy sales volumes refined products 141 million barrels per day 2008 decrease 3 percent 2007 branded gasoline sales volumes 617000 barrels per day 2009 3 percent 2 percent 2008 2007 respectively refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refineryinput volumes fs7 management’s discussion analysis financial condition results operations international downstream refining marketing transportation international downstream earnings 838 million 2009 decreased 12 billion 2008 approximate 26 billion decline periods associated weaker margins sale gasoline refined products absence gains recorded 2008 commodity derivative instruments foreigncurrency effects produced negative variance 400 million partially offsetting items 10 billion benefit lower operating expenses associated mainly contract labor professional services transportation costs 550 million increase gains asset sales primarily certain countries latin america africa earnings 2008 21 billion decreased nearly 500 million 2007 earnings 2007 included gains approximately 1 billion sale assets included marketing assets benelux region europe interest refinery 500 million improvement years associated primarily benefit gains derivative commodity instruments partially offset impact lower margins sales refined products foreigncurrency effects increased earnings 193 million 2008 compared 62 million 2007 refinedproduct sales volumes 185 million barrels per day 2009 8 percent lower 2008 due mainly effects asset sales lower demand refinedproduct sales volumes 202 million barrels per day 2008 level 2007 refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refineryinput volumes chemicals segment includes company’s oronite subsidiary 50 percentowned chevron phillips chemical company llc cpchem 2009 earnings 409 million compared 182 million 396 million 2008 2007 respectively cpchem earnings improvement 2008 2009 reflected lower utility manufacturing costs well absence impairment recorded 2008 benefits partially offset lower margins sale commodity chemicals oronite earnings increased 2009 due higher margins sales lubricant fuel additives effect offset impact lower sales volumes 2008 segment earnings 182 million compared 396 million 2007 earnings declined 2008 due lower sales volumes commodity chemicals cpchem higher expenses planned maintenance activities also contributed earnings decline earnings also declined oronite due lower volumes higher operating expenses includes mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies company’s interest dynegy inc prior sale may 2007 net charges 2009 decreased 468 million 2008 due lower provisions environmental remediation sites fs8 previously closed sold favorable foreigncurrency effects lower expenses employee compensation benefits net charges 2008 increased 14 billion 2007 results 2008 included net unfavorable corporate tax items increased costs environmental remediation foreigncurrency effects also contributed increase net charges 2007 2008 results 2007 included 680 million gain sale company’s investment dynegy common stock loss approximately 175 million associated early redemption texaco capital inc bonds consolidated statement income comparative amounts certain income statement categories shown sales operating revenues decreased 2009 due mainly lower prices crude oil natural gas refined products higher 2008 prices resulted increased revenues compared 2007 income equity affiliates decreased 2009 2008 upstreamrelated affiliate income declined 13 billion mainly due lower earnings tengizchevroil tco kazakhstan result lower prices crude oil downstreamrelated affiliate earnings lower approximately 10 billion primarily due weaker margins unfavorable swing foreigncurrency effects income equity affiliates increased 2008 2007 largely due improved upstreamrelated earnings tco result higher prices crude oil refer note 12 beginning page fs43 discussion chevron’s investments affiliated companies income 918 million 2009 included gains approximately 13 billion asset sales income 27 billion 2008 2007 included net gains asset sales 13 billion 17 billion respectively interest income approximately 95 million 2009 340 million 2008 600 million 2007 foreigncurrency effects reduced income 466 million 2009 increasing income 355 million 2008 reducing income 352 million 2007 addition income 2008 included approximately 700 million favorable settlements items crude oil product purchases 2009 decreased 717 billion 2008 due lower prices crude oil natural gas refined products crude oil product purchases 2008 increased 381 billion 2007 due higher prices crude oil natural gas refined products operating selling general administrative expenses 2009 decreased approximately 42 billion 2008 primarily due 14 billion lower fuel transportation expenses 800 million decreased costs contract labor professional services absence uninsured 2008 hurricanerelated charges 700 million decrease 500 million environmental remediation activities 200 million lower costs materials 600 million items total expenses 2008 37 billion higher 2007 primarily due 12 billion higher costs employee contract labor professional services 600 million increased transportation expenses 700 million uninsured losses associated hurricanes gulf mexico 2008 increase 300 million environmental remediation activities 200 million higher material expenses 700 million increases items exploration expenses 2009 increased 2008 due mainly higher amounts well writeoffs united states international operations expenses 2008 declined 2007 mainly due lower amounts well writeoffs operations united states depreciation depletion amortization expenses increased 2009 2008 due incremental production related startups upstream projects united states africa higher depreciation rates certain oil gas producing fields increase 2008 2007 largely due higher depreciation rates certain crudeoil naturalgas producing fields reflecting completion highercost development projects assetretirement obligations taxes income decreased 2009 2008 mainly due lower import duties company’s downstream operations united kingdom taxes income decreased 2008 2007 mainly due lower import duties result effects 2007 sales fs9 management’s discussion analysis financial condition results operations company’s benelux refining marketing businesses decline import volumes united kingdom interest debt expense increased 2009 due increase longterm debt interest debt expense decreased 2008 interestrelated amounts capitalized effective income tax rates 43 percent 2009 44 percent 2008 42 percent 2007 rate lower 2009 2008 mainly due effect 2009 deferred tax benefits relatively low tax rates asset sales related international upstream project addition greater proportion beforetax income earned 2009 equity affiliates 2008 equityaffiliate income reported single amount aftertax basis consolidated statement income partially offsetting items effect greater proportion income earned 2009 tax jurisdictions higher tax rates rate higher 2008 compared 2007 primarily due greater proportion income earned tax jurisdictions higher income tax rates addition 2007 period included relatively low effective tax rate sale company’s investment dynegy common stock sale downstream assets europe refer also discussion income taxes note 15 beginning page fs46 selected operating data12 includes company share equity affiliates mbpd thousands barrels per day mmcfpd millions cubic feet per day mboepd thousands barrels oilequivalents per day bbl barrel mcf thousands cubic feet oilequivalent gas oeg conversion ratio 6000 cubic feet natural gas 1 barrel oil includes natural gas consumed operations mmcfpd fs10 liquidity capital resources cash equivalents marketable securities total balances 88 billion 96 billion december 31 2009 2008 respectively cash provided operating activities 2009 194 billion compared 296 billion 2008 250 billion 2007 cash provided operating activities net contributions employee pension plans approximately 17 billion 800 million 300 million 2009 2008 2007 respectively cash provided investing activities included proceeds deposits related asset sales 26 billion 2009 15 billion 2008 33 billion 2007 restricted cash 123 million 367 million associated various capitalinvestment projects december 31 2009 2008 respectively invested shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet dividends paid common stockholders approximately 53 billion 2009 52 billion 2008 48 billion 2007 july 2009 company increased quarterly common stock dividend 46 percent 068 per share debt capital lease obligations total debt capital lease obligations 105 billion december 31 2009 89 billion yearend 2008 16 billion increase total debt capital lease obligations 2009 included net effect 5 billion public bond issuance 350 million issuance taxexempt gulf opportunity zone bonds 32 billion decrease commercial paper 400 million payment principal texaco capital inc bonds matured january 2009 company’s debt capital lease obligations due within one year consisting primarily commercial paper current portion longterm debt totaled 46 billion december 31 2009 78 billion yearend 2008 amounts 42 billion 50 billion reclassified longterm end period respectively yearend 2009 settlement obligations expected require use working capital 2010 company intent ability evidenced committed credit facilities refinance longterm basis yearend 2009 company 51 billion committed credit facilities various major banks permit refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2009 addition company automatic shelf registration statement expires march 2010 unspecified amount nonconvertible debt securities issued guaranteed company intends file new shelf registration statement current one expires company outstanding public bonds issued chevron corporation chevron corporation profit sharing savings plan trust fund texaco capital inc union oil company california securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capitalspending program cash may generated asset dispositions company believes substantial borrowing capacity meet unanticipated cash requirements periods low prices crude oil natural gas narrow margins refined products commodity chemicals flexibility increase borrowings andor modify capitalspending plans continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program september 2007 company authorized acquisition 15 billion common shares prevailing prices permitted securities laws legal requirements subject market conditions factors program period three years expiring 2010 may discontinued time company acquire shares 2009 plan acquire shares first quarter 2010 inception program company acquired 119 million shares cost 101 billion fs11 management’s discussion analysis financial condition results operations capital exploratory expenditures capital exploratory expenditures total expenditures 2009 222 billion including 16 billion company’s share equityaffiliate expenditures 2 billion extension upstream concession 2008 2007 expenditures 228 billion 200 billion respectively including company’s share affiliates’ expenditures 23 billion periods 222 billion expenditures 2009 threefourths 171 billion related upstream activities approximately percentage also expended upstream operations 2008 2007 international upstream accounted 80 percent worldwide upstream investment 2009 percent 2008 2007 reflecting company’s continuing focus opportunities available outside united states company estimates 2010 capital exploratory expenditures 216 billion including 16 billion spending affiliates 80 percent total 173 billion budgeted exploration production activities 132 billion amount projects outside united states spending 2010 primarily targeted exploratory prospects us gulf mexico major development projects angola australia brazil canada china nigeria thailand us gulf mexico also included funding base business improvements focused appraisals core hydrocarbon basins worldwide downstream spending 2010 estimated 34 billion 16 billion projects united states major capital outlays include projects construction refineries united states south korea construction gastoliquids facilities support associated upstream projects investments chemicals technology corporate businesses 2010 budgeted 900 million technology investments include projects related unconventional hydrocarbon technologies oil gas reservoir management gasfired renewable power generation noncontrolling interests company noncontrolling interests 647 million 469 million december 31 2009 2008 respectively distributions noncontrolling interests totaled 71 million 99 million 2009 2008 respectively pension obligations 2009 company’s pension plan contributions 17 billion including 15 billion us plans 200 million international plans company estimates contributions 2010 approximately 900 million 600 million us plans 300 million international plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs18 financial ratios financial ratios current ratio current assets divided current liabilities current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2009 book value inventory fs12 lower replacement costs based average acquisition costs year approximately 55 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs company’s interest coverage ratio 2009 lower 2008 2007 due lower beforetax income debt ratio total debt percentage total debt plus chevron corporation stockholders’ equity increase 2009 2008 2007 primarily due increase debt result 5 billion issuance public bonds 2009 guarantees offbalance sheet arrangements contractual obligations contingencies direct guarantee company’s guarantee approximately 600 million associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2009 company paid 48 million indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets origi nally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims asserted february 2009 equilon indemnities must asserted later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments february 2009 shell delivered letter company purporting preserve unmatured claims certain equilon indemnities letter provides estimate ultimate claim amount management believe letter information provides basis estimate amount range loss potential range loss respect either equilon motiva indemnities company posts assets collateral made payments indemnities amounts payable indemnities described preceding paragraph net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 million reached december 31 2009 indemnification agreement reaching 200 million obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2010 75 billion 2011 43 billion 2012 14 billion 2013 14 billion 2014 10 billion 2015 41 billion portion commitments may ultimately shared project fs13 management’s discussion analysis financial condition results operations partners total payments agreements approximately 81 billion 2009 51 billion 2008 37 billion 2007 following table summarizes company’s significant contractual obligations contractual obligations1 excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 21 beginning page fs52 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect results operations consolidated financial position liquidity single period 42 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20112012 period include obligations purchase company’s share natural gas liquids regasified natural gas associated operations 364 percentowned angola lng affiliate lng plant expected commence operations 2012 designed produce 52 million metric tons lng related natural gas liquids per year volumes prices associated purchase obligations neither fixed determinable financial derivative instruments market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk discussed represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2009 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2009 company’s market exposure positions monitored managed daily basis internal risk control group accordance company’s risk management policies approved audit committee company’s board directors derivative commodity instruments used company’s risk management trading activities consist mainly futures options swap contracts traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition crude oil natural gas refinedproduct swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2009 quarterly average decrease 168 million total assets quarterly average decrease 104 million total liabilities company uses valueatrisk var model estimate potential loss fair value single day effect adverse changes market conditions derivative commodity instruments held issued recorded balance sheet december 31 2009 derivative commodity instruments accordance accounting standards derivatives asc 815 var maximum loss exceeded within given probability confidence level given period time company’s var model uses monte carlo simulation method involves generating hypothetical scenarios specified probability distribution constructing full distribution portfolio’s potential values var model utilizes exponentially weighted moving average computing historical volatilities correlations 95 percent confidence level oneday holding period company’s 95 percent oneday var corresponds unrealized loss portfolio value would exceeded average one every 20 trading days portfolio held constant one day oneday holding period based assumption marketrisk positions liquidated hedged within one day hedging risk management company uses conventional exchangetraded instruments futures options well nonexchangetraded swaps fs14 liquidated hedged effectively within one day table presents 95 percentoneday var company’s primary risk exposures area derivative commodity instruments december 31 2009 2008 lower amounts 2009 primarily associated decrease price volatility commodities year foreign currency company may enter foreigncurrency derivative contracts manage foreigncurrency exposures include revenue anticipated purchase transactions including foreigncurrency capital expenditures lease commitments foreigncurrency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreigncurrency derivative contracts december 31 2009 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt historically terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2009 company interest rate swaps floatingrate debt company’s interest rate swaps fixedrate debt matured january 2009 company interest rate swaps fixedrate debt yearend 2009 transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer financial information note 24 consolidated financial statements page fs61 discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party 50 pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable could material net income one period company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 million certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations april 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 8 billion would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 83 billion could assessed chevron unjust enrichment engineer’s report binding court chevron also believes engineer’s work fs15 management’s discussion analysis financial condition results operations performed report prepared manner contrary law violation court’s orders chevron submitted rebuttal report asked court strike report entirety november 2008 engineer revised report without additional evidence recommended increase financial compensation purported damages total 189 billion increase assessment purported unjust enrichment total 84 billion chevron submitted rebuttal revised report court dismissed september 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case petitioned recused late september 2009 judge recused october 2009 full chamber provincial court affirmed recusal resulting appointment new judge chevron filed motions annul rulings made prior judge new judge denied motions court completed procedural aspects case could render judgment time chevron continue vigorous defense attempted imposition liability event adverse judgment chevron would expect pursue appeals vigorously defend enforcement judgment therefore ultimate outcome financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated engineer’s report management believe report utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crudeoil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws included 1700 million yearend 2009 reserve balance remediation activities approximately 250 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2009 185 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity fs16 remaining yearend 2009 environmental reserves balance 1515 million 820 million related company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 695 million associated various sites international downstream 107 million upstream 369 million chemicals 149 million businesses 70 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2009 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties accounting standards asset retirement obligations asc 410 fair value liability asset retirement obligation recorded legal obligation associated retirement longlived assets liability reasonably estimated liability balance approximately 102 billion asset retirement obligations yearend 2009 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 23 page fs60 related company’s asset retirement obligations discussion “environmental matters” page fs18 income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs46 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity suspended wells company suspends costs exploratory wells pending final determination commercial potential related crudeoil naturalgas fields ultimate disposition well costs dependent results future drilling activity development decisions december 31 2009 company approximately 24 billion suspended exploratory wells included properties plant equipment increase 317 million 2008 balance reflected increase 458 million 2007 future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 24 billion suspended wells yearend 2009 uncertain pending future activities including normal project evaluation additional drilling refer note 19 beginning page fs50 additional discussion suspended wells equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crudeoil naturalgas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 million possible maximum net amount could owed chevron estimated 150 million timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve fs17 management’s discussion analysis financial condition results operations company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned wastedisposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2009 approximately 35 billion consolidated companies included expenditures approximately 17 billion environmental capital expenditures 18 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2010 total worldwide environmental capital expenditures estimated 21 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply exist ing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation crudeoil naturalgas reserves sec rules effective december 31 2009 require “by analysis geosciences engineering data reserves estimated reasonable certainty economically producibleunder existing economic conditions” existing economic conditions include prices based average price fs18 12month period refer table v “reserve quantity information” beginning page fs69 changes estimates three years ending december 31 2009 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs77 estimates provedreserve values three years ended december 31 2009 note 1 consolidated financial statements beginning page fs32 includes description “successful efforts” method accounting oil gas exploration production activities estimates crudeoil naturalgas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment properties plant equipment investments affiliates” beginning page fs20 includes reference conditions downward revisions provedreserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs32 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pensionplan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 21 beginning page fs52 includes information funded status company’s pension opeb plans end 2009 2008 components pension opeb expense three years ending december 31 2009 underlying assumptions periods pension opeb expense reported consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments yearend 2009 2008 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet differences related overfunded pension plans reported longterm asset “deferred charges assets” differences associated underfunded unfunded pension opeb plans reported “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense reported “accumulated comprehensive loss” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies expected longterm rate return us pension plan assets account 69 percent company’s pension plan assets remained 78 percent since 2002 10 years ending december 31 2009 actual asset returns averaged 37 percent plan actual return 2009 157 percent associated broad recovery financial markets yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2009 company selected 53 percent discount rate major us pension plan 58 percent opeb plan rates selected based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2009 discount rates end 2008 2007 63 percent years us pension opeb plans increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2009 11 billion indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2009 approximately 50 million 1 percent increase discount rate plan accounted 61 percent fs19 management’s discussion analysis financial condition results operations companywide pension obligation would reduced total pension plan expense 2009 approximately 150 million increase discount rate would decrease pension obligation thus changing funded status plan reported consolidated balance sheet total pension liability consolidated balance sheet december 31 2009 underfunded plans approximately 38 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 300 million would decreased plan’s underfunded status approximately 16 billion 13 billion plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2009 company’s pension plan contributions 17 billion including 15 billion us plans 2010 company estimates contributions approximately 900 million actual contribution amounts dependent upon planinvestment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2009 164 million total liability reflected unfunded status plans end 2009 31 billion indication discount rate sensitivity determination opeb expense 2009 1 percent increase discount rate company’s primary us opeb plan accounted 69 percent companywide opeb expense would decreased opeb expense approximately 11 million 025 percent increase discount rate plan accounted 84 percent companywide opeb liabilities would decreased total opeb liabilities end 2009 approximately 65 million main us postretirement medical plan annual increase company contributions limited 4 percent per year active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 7 percent 2010 gradually drop 5 percent 2018 beyond indication health care costtrend rate sensitivity determination opeb expense 2009 1 percent increase rates main us opeb plan accounted 84 percent companywide opeb liabilities would increased opeb expense 8 million differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 21 beginning page fs52 information 67 billion beforetax actuarial losses recorded company december 31 2009 description method used amortize costs estimate costs recognized expense 2010 impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crudeoil naturalgas properties significant downward revisions estimated provedreserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions major individual impairments ppe investments recorded three years ending december 31 2009 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired fs20 investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines whether writedown carrying value asset group required example significant downward revisions crudeoil naturalgas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 15 beginning page fs46 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2009 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162 fas 168 june 2009 fasb issued fas 168 became effective company quarter ending september 30 2009 standard established fasb accounting standards codification asc system single authoritative source us generally accepted accounting principles gaap superseded existing literature fasb emerging issues task force american institute cpas sources asc change gaap organized literature 90 accounting topics adoption asc affect company’s accounting employer’s disclosures postretirement benefit plan assets fsp fas 132r1 december 2008 fasb issued fsp fas 132r1 subsequently codified asc 715 compensation retirement benefits became effective company’s reporting december 31 2009 standard amended expanded disclosure requirements plan assets defined benefit pension postretirement plans refer information beginning page fs52 note 21 employee benefits disclosures transfers servicing asc 860 accounting transfers financial assets asu 200916 fasb issued asu 200916 december 2009 standard became effective company january 1 2010 asu 200916 fs21 changes companies account transfers financial assets eliminates concept qualifying specialpurpose entities adoption guidance expected impact company’s results operations financial position liquidity consolidation asc 810 improvements financial reporting enterprises involved variable interest entities asu 200917 fasb issued asu 200917 december 2009 standard became effective company january 1 2010 asu 200917 requires enterprise qualitatively assess primary beneficiary variableinterest entity vie must consolidated adoption standard expected material impact company’s results operations financial position liquidity extractive industries oil gas asc 932 oil gas reserve estimation disclosures asu 201003 january 2010 fasb issued asu 201003 became effective company december 31 2009 standard amends certain sections asc 932 extractive industries oil gas align requirements securities exchange commission’s final rule modernization oil gas reporting requirements final rule final rule issued december 31 2008 refer table v reserve quantity information beginning page fs69 additional information final rule impact adoption fs22 page intentionally left blank fs23 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx february 19 2010 stockholders record numbered approximately 195000 restrictions company’s ability pay dividends fs24 management’s responsibility financial statements stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2009 effectiveness company’s internal control financial reporting december 31 2009 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein john watson patricia e yarrington mark humphrey chairman board vice president vice president chief executive officer chief financial officer comptroller february 25 2010 fs25 report independent registered public accounting firm stockholders board directors chevron corporation opinion accompanying consolidated balance sheets related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 2009 december 31 2008 results operations cash flows three years period ended december 31 2009 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2009 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp san francisco california february 25 2010 fs26 consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs27 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs28 consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs29 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs30 consolidated statement equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs31 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general exploration production upstream operations consist exploring developing producing crude oil natural gas marketing natural gas refining marketing transportation downstream operations relate refining crude oil finished petroleum products marketing crude oil many products derived petroleum transporting crude oil natural gas petroleum products pipeline marine vessel motor equipment rail car chemical operations include manufacture marketing commodity petrochemicals plastics industrial uses fuel lubricant oil additives company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity foreign currency exposures gains losses derivative instruments reported current income interest rate swaps hedging portion company’s fixedrate debt accounted fair value hedges whereas interest rate swaps relating portion company’s floatingrate debt recorded fair value consolidated balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals generally stated cost using lastin firstout lifo method aggregate costs market “materials supplies other” inventories generally stated average cost fs32 note 1 summary significant accounting policies continued properties plant equipment successful efforts method used crudeoil naturalgas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crudeoil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page fs50 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crudeoil naturalgas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crudeoil naturalgas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate refining marketing transportation chemicals areas impairment reviews generally done basis refinery plant marketing area marketing assets country impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value required accounting standards asset retirement environmental obligations accounting standards codification asc 410 fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 23 page fs60 relating aros depreciation depletion capitalized costs proved crudeoil naturalgas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses mining assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crudeoil naturalgas mineralproducing properties liability aro made fs33 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies continued following accounting standards asset retirement environmental obligations refer note 23 page fs60 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency translations currently included income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs27 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation employees accounts transactions accounting standards sharebased compensation asc 718 equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 noncontrolling interests company adopted accounting standards noncontrolling interests asc 810 consolidated financial statements effective january 1 2009 retroactive earliest period presented ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” activity equity attributable noncontrolling interests 2009 2008 2007 follows note 3 equity retained earnings december 31 2009 2008 included approximately 8122 7951 respectively company’s share undistributed earnings equity affiliates december 31 2009 94 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron corporation longterm incentive plan ltip addition approximately 342000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan nonemployee directors’ plan fs34 note 4 information relating consolidated statements cash flows accordance accounting standards cashflow classifications stock options asc 718 “net increase decrease operating working capital” includes reductions 25 106 96 excess income tax benefits associated stock options exercised 2009 2008 2007 respectively amounts offset equal amount “net sales purchases treasury shares” “net sales purchases treasury shares” represents cost common shares purchased less cost shares issued sharebased compensation plans purchases totaled 6 8011 7036 2009 2008 2007 respectively purchases 2008 2007 included shares purchased company’s common stock repurchase programs 2009 “net sales purchases shortterm investments” consisted 123 restricted cash associated capitalinvestment projects company’s pascagoula mississippi refinery angola liquefiednaturalgas project invested shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet company issued 350 650 2009 2007 respectively tax exempt mississippi gulf opportunity zone bonds source funds pascagoula refinery projects consolidated statement cash flows 2009 excludes changes consolidated balance sheet affect cash 2008 “net sales purchases treasury shares” excludes 680 treasury shares acquired exchange us upstream property 280 cash carrying value property “properties plant equipment” consolidated balance sheet significant 2008 2450 increase “accrued liabilities” corresponding increase “properties plant equipment cost” considered noncash transactions excluded “net increase decrease operating working capital” “capital expenditures” 2009 payments related “accrued liabilities” excluded “net increase decrease operating working capital” reported “capital expenditures” amount related upstream operating agreements outside united states “capital expenditures” 2008 excludes 1400 increase “properties plant equipment” related acquisition additional interest equity affiliate required change consolidated method accounting investment 2008 addition offset primarily reductions “investments advances” working capital increase “noncurrent deferred income tax” liabilities refer also note 23 page fs60 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2009 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table fs35 notes consolidated financial statements millions dollars except pershare amounts note 5 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method 2008 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa summarized financial information cusa consolidated subsidiaries presented table gives retroactive effect reorganizations occurred january 1 2007 however financial information following table may reflect financial position operating results future historical results periods presented reorganization actually occurred date summarized financial information cusa consolidated subsidiaries follows amount years ended december 31 2008 december 31 2007 “net income attributable cusa” balances december 31 2008 “other liabilities” “total cusa net equity” adjusted immaterial amounts associated allocation incometax liabilities among chevron corporation subsidiaries note 6 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries follows restrictions ctc’s ability pay dividends make loans advances december 31 2009 note 7 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 12 page fs43 discussion tco operations summarized financial information 100 percent tco presented following table fs36 note 8 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve tanker charters crudeoil production processing equipment service stations office buildings facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2009 2008 2007 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2009 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 9 fair value measurements accounting standards fairvalue measurement asc 820 establish framework measuring fair value stipulate disclosures fairvalue measurements standards apply recurring nonrecurring financial nonfinancial assets liabilities require permit fairvalue measurements asc 820 became effective chevron january 1 2008 financial assets liabilities recurring nonfinancial assets liabilities january 1 2009 standard became effective nonrecurring nonfinancial assets liabilities among required disclosures fairvalue hierarchy inputs company uses value asset liability three levels fairvalue hierarchy described follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract fs37 notes consolidated financial statements millions dollars except pershare amounts note 9 fair value measurements continued level 3 unobservable inputs company use level 3 inputs recurring fairvalue measurements level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities 2009 company used level 3 inputs determine fair value certain nonrecurring nonfinancial assets fairvalue hierarchy recurring assets liabilities measured fair value december 31 2009 december 31 2008 follows assets liabilities measured fair value recurring basis marketable securities company calculates fair value marketable securities based quoted market prices identical assets liabilities fair values reflect cash would received instruments sold december 31 2009 marketable securities average maturities less one year derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value virtually offsetting amount consolidated statement income derivatives identical similar provisions contracts publicly traded regular basis company uses market values publicly traded instruments input fairvalue calculations company’s derivative instruments principally include crudeoil naturalgas refinedproduct futures swaps options forward contracts derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pric ing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information company incorporates internal review evaluation assessment procedures including comparison level 2 fair values derived company’s internally developed forward curves sample basis pricing information document reasonable logical supportable fairvalue determinations proper level classification impairments “properties plant equipment” 2009 accordance accounting standard impairment disposal longlived assets asc 360 longlived assets “held used” carrying amount 949 written fair value 490 resulting beforetax loss 459 fair values determined internal cashflow models using discount rates consistent used company evaluate cash flows assets similar nature longlived assets “held sale” carrying amount 160 written fair value 68 resulting beforetax loss 92 fair values determined based bids received prospective buyers fs38 note 9 fair value measurements continued fairvalue hierarchy nonrecurring assets liabilities measured fair value 2009 presented following table assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents us nonus portfolios instruments held primarily time deposits money market funds fair values reflect cash would received paid instruments settled yearend cash equivalents carryingfair values 6396 7058 december 31 2009 2008 respectively average maturities 90 days balance december 31 2009 includes 123 investments restricted funds related international upstream development project pascagoula refinery projects included “deferred charges assets” consolidated balance sheet longterm debt 5705 1221 estimated fair values 6229 1414 december 31 2009 2008 respectively fair values financial instruments end 2009 2008 material note 10 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions pur chase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company’s derivative commodity instruments principally include crudeoil naturalgas refinedproduct futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodities derivatives activities company uses international swaps derivatives association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk derivative instruments measured fair value december 31 2009 december 31 2008 classification consolidated balance sheet consolidated statement income follows consolidated balance sheet fair value derivatives designated hedging instruments fs39 notes consolidated financial statements millions dollars except pershare amounts note 10 financial derivative instruments continued consolidated statement income effect derivatives designated hedging instruments foreign currency company may enter currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open currency derivative contracts december 31 2009 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt historically terms swaps net cash settlements based difference fixedrate floatingrate interest amounts calculated reference agreed notional principal amounts interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2009 company interest rate swaps company’s interest rate swaps fixedrate debt matured january 2009 concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings diversified investment policy limits company’s exposure credit risk concentrations credit risk similar standards diversity creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers note 11 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates purpose investments grouped follows upstream exploration production downstream refining marketing transportation chemicals first three groupings represent company’s “reportable segments” “operating segments” defined accounting standards segment reporting asc 280 segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined asc 280 codm company’s executive committee senior officers includes chief executive officer turn reports board directors chevron corporation operating segments represent components company described accounting standards segment reporting asc 280 engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assess performance c discrete financial information available segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers fs40 note 11 operating segments geographic data continued members executive committee also individual management responsibilities participate committees purposes acting codm “all other” activities include mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies company’s interest dynegy may 2007 chevron sold interest company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2009 2008 follows “all other” assets consist primarily worldwide cash equivalents marketable securities real estate information systems mining operations power generation businesses alternative fuels technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2009 2008 2007 presented table following page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues transportation trading refined products crude oil natural gas liquids revenues fs41 notes consolidated financial statements millions dollars except pershare amounts note 11 operating segments geographic data continued chemicals segment derived primarily manufacture sale additives lubricants fuels “all other” activities include revenues mining operations power generation businesses insurance operations real estate activities technology companies united states single country accounted 10 percent company’s total sales operating revenues 2009 2008 2007 segment income taxes segment income tax expense years 2009 2008 2007 follows segment information additional information segmentation major equity affiliates contained note 12 beginning page fs43 information related properties plant equipment segment contained note 13 page fs45 fs42 note 12 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crudeoil fields kazakhstan 40year period december 31 2009 company’s carrying value investment tco 200 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 7 page fs36 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company formed 2008 operate hamaca heavyoil production upgrading project located venezuela’s orinoco belt 25year contract term prior formation petropiar chevron 30 percent interest hamaca project december 31 2009 company’s carrying value investment petropiar approximately 195 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2009 company’s carrying value investment petroboscan approximately 275 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng ltd chevron 36 percent interest angola lng ltd process liquefy natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs holdings joint venture imports refines markets petroleum products petrochemicals predominantly south korea caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium provides critical export route crude oil tco karachaganak star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company ltd sprc owns star refinery thailand petroleum authority thailand owns remaining 36 percent sprc caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2009 fs43 notes consolidated financial statements millions dollars except pershare amounts note 12 investments advances continued fair value chevron’s share cal common stock approximately 1120 colonial pipeline company chevron owns approximate 23 percent equity interest colonial pipeline company colonial pipeline system runs texas new jersey transports petroleum products 13state market december 31 2009 company’s carrying value investment colonial pipeline approximately 550 higher amount underlying equity colonial pipeline net assets difference primarily relates purchase price adjustments acquisition unocal corporation chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned conocophillips corporation information “sales operating revenues” consolidated statement income includes 10391 15390 11555 affiliated companies 2009 2008 2007 respectively “purchased crude oil products” includes 4631 6850 5464 affiliated companies 2009 2008 2007 respectively “accounts notes receivable” consolidated balance sheet includes 1125 701 due affiliated companies december 31 2009 2008 respectively “accounts payable” includes 345 289 due affiliated companies december 31 2009 2008 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 2422 december 31 2009 fs44 note 13 properties plant equipment1 note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party 50 pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable could material net income one period company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously fs45 notes consolidated financial statements millions dollars except pershare amounts note 14 litigation continued given texpet republic ecuador petroecuador regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations april 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 8000 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8300 could assessed chevron unjust enrichment engineer’s report binding court chevron also believes engineer’s work performed report prepared manner contrary law violation court’s orders chevron submitted rebuttal report asked court strike report entirety november 2008 engineer revised report without additional evidence recommended increase financial compensation purported damages total 18900 increase assessment purported unjust enrichment total 8400 chevron submitted rebuttal revised report court dismissed september 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case petitioned recused late september 2009 judge recused october 2009 full chamber provincial court affirmed recusal resulting appointment new judge chevron filed motions annul rulings made prior judge new judge denied motions court completed procedural aspects case could render judgment time chevron continue vigorous defense attempted imposition liability event adverse judgment chevron would expect pursue appeals vigorously defend enforcement judgment therefore ultimate outcome financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated engineer’s report management believe report utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 15 taxes income taxes 2009 beforetax income us operations including related corporate charges 1310 compared beforetax income 10765 7886 2008 2007 respectively international operations beforetax income 17218 32292 24388 2009 2008 2007 respectively us federal income tax expense reduced 204 198 132 2009 2008 2007 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate explained following table fs46 note 15 taxes continued company’s effective tax rate decreased 442 percent 2008 430 percent 2009 rate lower 2009 mainly due effect deferred tax benefits relatively low tax rates asset sales related international upstream project addition greater proportion beforetax income earned 2009 equity affiliates 2008 equityaffiliate income reported single amount aftertax basis consolidated statement income partially offsetting items effect greater proportion income earned 2009 tax jurisdictions higher tax rates company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2009 increased approximately 400 yearend 2008 increase primarily related increased temporary differences properties plant equipment deferred tax assets essentially unchanged 2009 increases related additional foreign tax credits arising earnings hightaxrate international jurisdictions substantially offset valuation allowances inventoryrelated temporary differences effects offset reductions deferred credits tax loss carryforwards primarily resulting usage tax benefits international tax jurisdictions overall valuation allowance relates deferred tax assets foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized tax loss carryforwards exist many international jurisdictions whereas tax loss carryforwards expiration date others expire various times 2010 2036 foreign tax credit carryforwards 5387 expire 2010 2019 december 31 2009 2008 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 20458 december 31 2009 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings intended reinvested indefinitely end 2009 deferred income taxes recorded undistributed earnings certain international operations company longer intends indefinitely reinvest earnings company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions accounting standards uncertainty income taxes asc 74010 company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes asc 7401020 refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods fs47 notes consolidated financial statements millions dollars except pershare amounts note 15 taxes continued following table indicates changes company’s unrecognized tax benefits year ended december 31 2009 term “unrecognized tax benefits” accounting standards income taxes asc 7401020 refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included although unrecognized tax benefits individual tax positions may increase decrease 2010 company believes change individually significant 2010 approximately 90 percent 3195 unrecognized tax benefits december 31 2009 would impact effective tax rate subsequently recognized tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2009 jurisdictions latest years income tax examinations finalized follows united states 2005 nigeria 1994 angola 2001 saudi arabia 2003 consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2009 accruals 232 anticipated interest penalty obligations included consolidated balance sheet compared accruals 276 yearend 2008 income tax benefit expense associated interest penalties 20 79 70 2009 2008 2007 respectively taxes income note 16 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders within one year following fs48 balance sheet date 2009 350 taxexempt gulf opportunity zone bonds related projects pascagoula refinery issued company periodically enters interest rate swaps portion shortterm debt december 31 2009 company interest rate swaps shortterm debt see note 10 beginning page fs39 information concerning company’s debtrelated derivative activities december 31 2009 company 5100 committed credit facilities banks worldwide permit company refinance shortterm obligations longterm basis facilities support company’s commercial paper borrowings interest borrowings terms specific agreements may based london interbank offered rate bank prime rate amounts outstanding credit agreements 2009 yearend december 31 2009 2008 company classified 4190 4950 respectively shortterm debt longterm settlement obligations expected require use working capital 2010 company intent ability refinance debt longterm basis note 17 longterm debt total longterm debt excluding capital leases december 31 2009 9829 company’s longterm debt outstanding yearend 2009 2008 follows longterm debt 5705 matures follows 2010 66 2011 33 2012 1520 2013 21 2014 2020 2014 2045 2009 5000 public bonds issued 400 texaco capital inc bonds matured 2008 debt totaling 822 matured including 749 chevron canada funding company notes note 18 new accounting standards fasb accounting standards codification hierarchy generally accepted accounting principles replacement fasb statement 162 fas 168 june 2009 fasb issued fas 168 became effective company quarter ending september 30 2009 standard established fasb accounting standards codification asc system single authoritative source us generally accepted accounting principles gaap superseded existing literature fasb emerging issues task force american institute cpas sources asc change gaap organized literature 90 accounting topics adoption asc affect company’s accounting employer’s disclosures postretirement benefit plan assets fsp fas 132r1 december 2008 fasb issued fsp fas 132r1 subsequently codified asc 715 compensation retirement benefits became effective company’s reporting december 31 2009 standard amended expanded disclosure requirements plan assets defined benefit pension postretirement plans refer information beginning page fs52 note 21 employee benefits disclosures transfers servicing asc 860 accounting transfers financial assets asu 200916 fasb issued asu 200916 december 2009 standard became effective company january 1 2010 asu 200916 changes companies account transfers financial assets eliminates concept qualifying specialpurpose entities adoption guidance expected impact company’s results operations financial position liquidity consolidation asc 810 improvements financial reporting enterprises involved variable interest entities asu 200917 fasb issued asu 200917 december 2009 standard became effective company january 1 2010 asu 200917 requires enterprise qualitatively fs49 notes consolidated financial statements millions dollars except pershare amounts note 18 new accounting standards continued assess primary beneficiary variableinterest entity vie must consolidated adoption standard expected material impact company’s results operations financial position liquidity extractive industries oil gas asc 932 oil gas reserve estimation disclosures asu 201003 january 2010 fasb issued asu 201003 became effective company december 31 2009 standard amends certain sections asc 932 extractive industries oil gas align requirements securities exchange commission’s final rule modernization oil gas reporting requirements final rule final rule issued december 31 2008 refer table v reserve quantity information beginning page fs69 additional information final rule impact adoption note 19 accounting suspended exploratory wells accounting standards costs exploratory wells asc 932 provide exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b enterprise making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense accounting standards provide number indicators assist entity demonstrating sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2009 following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 1871 exploratory well costs capitalized one year december 31 2009 1143 28 projects related projects drilling activities way firmly planned near future 728 balance related 18 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development fs50 note 19 accounting suspended exploratory wells continued projects 728 referenced following activities associated assessing reserves projects’ economic viability 330 one project negotiation crudeoil naturalgas transportation contracts construction agreements b 107 two projects discussion possible naturalgas purchasers ongoing c 73 two projects continued unitization efforts adjacent discoveries span international boundaries planning lng facility commenced 49 one project progression development concept selection e 47 one project subsurface facilities engineering studies concluding frontend engineering design expected begin early 2010 f 34 one project reviewing development alternatives 88 miscellaneous activities 10 projects smaller amounts suspended progress made 46 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 1871 suspended well costs capitalized period greater one year december 31 2009 represents 149 exploratory wells 46 projects tables contain aging costs well project basis note 20 stock options sharebased compensation expense stock options 2009 2008 2007 182 119 tax 168 109 tax 146 95 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 170 110 tax 132 86 tax 205 133 tax 2009 2008 2007 respectively significant stockbased compensation cost capitalized december 31 2009 2008 cash received payment option exercises sharebased payment arrangements 2009 2008 2007 147 404 445 respectively actual tax benefits realized tax deductions option exercises 25 103 94 2009 2008 2007 respectively cash paid settle performance units stock appreciation rights 89 136 88 2009 2008 2007 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options 10year contractual lives extending 2011 retained provision restored provision enables participant exercises stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted beginning 2007 restored options issued ltip awards may granted former texaco plans unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans exercised awards expire early 2010 early 2015 fs51 notes consolidated financial statements millions dollars except pershare amounts note 20 stock options sharebased compensation continued fair market values stock options stock appreciation rights granted 2009 2008 2007 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2009 presented total intrinsic value ie difference exercise price market price options exercised 2009 2008 2007 91 433 423 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2009 233 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period 18 years january 1 2009 number ltip performance units outstanding equivalent 2400555 shares 2009 992800 units granted 668953 units vested cash proceeds distributed recipients 45294 units forfeited december 31 2009 units outstanding 2679108 fair value liability recorded instruments 233 addition outstanding stock appreciation rights awards granted various ltip former texaco unocal programs totaled approximately 15 million equivalent shares december 31 2009 liability 45 recorded awards march 2009 chevron granted eligible ltip employees restricted stock units lieu annual cash bonus expense associated special restricted stock units recognized time grants total 453965 units granted 6970 per unit time grant total fair value special restricted stock units 32 december 31 2009 special restricted stock units payable november 2010 note 21 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent per year certain life insurance benefits paid company accounting standards postretirement benefits asc 715 company recognizes overfunded underfunded status defined benefit pension opeb asset liability consolidated balance sheet funded status company’s pension postretirement benefit plans 2009 2008 following page fs52 note 21 employee benefit plans continued amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2009 2008 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 6454 5831 end 2009 2008 respectively amounts consisted accumulated benefit obligations us international pension plans 8707 4029 respectively december 31 2009 7376 3273 respectively december 31 2008 information us international pension plans accumulated benefit obligation excess plan assets december 31 2009 2008 fs53 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued components net periodic benefit cost amounts recognized comprehensive income 2009 2008 2007 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2009 company’s us pension international pension opeb plans amortized straightline basis approximately 11 13 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2010 company estimates actuarial losses 318 102 26 amortized “accumulated comprehensive loss” us pension international pension opeb plans respec tively addition company estimates additional 220 recognized “accumulated comprehensive loss” 2010 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2009 approximately eight 12 years us international pension plans respectively eight years postretirement benefit plans 2010 company estimates prior service credits costs 7 27 74 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs54 note 21 employee benefit plans continued assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 69 percent company’s pension plan assets december 31 2009 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2009 company selected 53 percent discount rate us pension plan 58 percent us postretirement benefit plan rate based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2009 discount rates end 2008 2007 63 percent us pension plan opeb plan benefit assumptions measurement accumulated postretirement benefit obligation december 31 2009 main us postretirement medical plan assumed health care costtrend rates start 7 percent 2010 gradually decline 5 percent 2018 beyond measurement december 31 2008 assumed health care costtrend rates started 7 percent 2009 gradually declined 5 percent 2017 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy effective december 31 2009 company implemented expanded disclosure requirements plan assets defined benefit pension opeb plans asc 715 provide users financial statements understanding investment allocation decisions made major categories plan assets inputs valuation techniques used measure fair value plan assets effect fairvalue measurements using unobservable inputs changes plan assets period significant concentrations risk within plan assets fairvalue hierarchy inputs company uses value pension assets divided three levels fs55 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued level 1 fair values assets measured using unadjusted quoted prices assets prices identical assets active markets plans ability access level 2 fair values assets measured based quoted prices similar assets active markets quoted prices identical similar assets inactive markets inputs quoted prices observable asset inputs derived principally corroborated observable market data correlation means asset contractual term level 2 input observable substantially full term asset fair values level 2 assets generally obtained thirdparty broker quotes independent pricing services exchanges level 3 inputs fair value measurement unobservable assets valuation may performed using financial model estimated inputs entered model fair value measurements company’s pension plans 2009 us equities include investments company’s common stock amount 29 december 31 2009 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixed income instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset category includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 effect fairvalue measurements using significant unobservable inputs changes level 3 plan assets period outlined fs56 note 21 employee benefit plans continued primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 84 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plan’s investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors established following approved asset allocation ranges equities 4070 percent fixed income cash 2060 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines reviewed regularly equities 6080 percent fixed income cash 2040 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset category risk significant concentrations risk plan assets due diversification investment categories company prefund opeb obligations cash contributions benefit payments 2009 company contributed 1494 245 us international pension plans respectively 2010 company expects contributions approximately 600 300 us international pension plans respectively actual contribution amounts dependent upon planinvestment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 208 2010 compared 187 paid 2009 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop described section follows total company matching contributions employee accounts within esip 257 231 206 2009 2008 2007 respectively cost reduced value shares released lesop totaling 184 40 33 2009 2008 2007 respectively remaining amounts totaling 73 191 173 2009 2008 2007 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted accounting standards sharebased compensation asc 718 debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total credits expense lesop 3 1 2009 2008 2007 respectively net credit respective years composed credits compensation expense 15 17 charges interest expense lesop debt 12 14 16 dividends paid lesop shares 110 35 8 used 2009 2008 2007 respectively service lesop debt contributions required 2009 2008 2007 dividends received lesop sufficient satisfy lesop debt service fs57 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2009 2008 follows benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2009 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2009 2008 trust assets 57 60 respectively invested primarily interestearning accounts employee incentive plans effective january 2008 company established chevron incentive plan cip single annual cash bonus plan eligible employees links awards corporate unit individual performance prior year plan replaced cash bonus programs primarily included management incentive plan mip chevron success sharing program 2009 2008 charges expense cash bonuses 561 757 respectively 2007 charges expense mip 184 charges cash bonus programs 431 chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 20 page fs51 note 22 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs46 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity guarantees company’s guarantee approximately 600 associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 end 2009 company paid 48 indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims asserted february 2009 equilon indemnities must asserted later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments february 2009 shell delivered letter company purporting preserve unmatured claims certain equilon indemnities letter provides estimate ultimate claim amount management believe letter information provides basis estimate amount range loss potential range loss respect either equilon motiva indemnities company posts assets collateral made payments indemnities fs58 note 22 contingencies commitments continued amounts payable indemnities described preceding paragraph net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities relating longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2010 7500 2011 4300 2012 1400 2013 1400 2014 1000 2015 4100 portion commitments may ultimately shared project partners total payments agreements approximately 8100 2009 5100 2008 3700 2007 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crudeoil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2009 1700 included balance remediation activities approximately 250 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2009 185 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2009 environmental reserves balance 1515 820 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals pipelines remaining 695 associated various sites international downstream 107 upstream 369 chemicals 149 businesses 70 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united fs59 notes consolidated financial statements millions dollars except pershare amounts note 22 contingencies commitments continued states include resource conservation recovery act various state local regulations single remediation site yearend 2009 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 23 discussion company’s asset retirement obligations equity redetermination oil gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crudeoil naturalgas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 possible maximum net amount could owed chevron estimated 150 timing settlement exact amount within range estimates uncertain contingencies chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 23 asset retirement obligations accordance accounting standards asset retirement obligations asc 410 company records fair value liability asset retirement obligation aro legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value legal obligations associated retirement tangible longlived assets require recognition certain circumstances including 1 present value liability offsetting asset aro 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates accounting standards asset retirement obligations primarily affect company’s accounting crudeoil naturalgas producing assets significant aros associated legal obligations retire refining marketing transportation downstream chemical longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream chemical longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2009 2008 2007 includes 175 revision aro liability retained properties sold table amounts associated “revisions estimated cash flows” reflect increasing costs abandon onshore offshore wells equipment facilities longterm portion 10175 balance end 2009 9289 fs60 note 24 financial information earnings 2009 included gains approximately 1000 relating sale nonstrategic properties amount approximately 600 400 related downstream upstream assets respectively earnings 2008 included gains approximately 1200 relating sale nonstrategic properties amount approximately 1000 related upstream assets earnings 2007 included gains approximately 2000 relating sale nonstrategic properties amount approximately 1100 related downstream assets 680 related sale company’s investment dynegy inc financial information follows excess replacement cost carrying value inventories lastin firstout lifo method used 5491 9368 december 31 2009 2008 respectively replacement cost generally based average acquisition costs year lifo charges profits 168 210 113 included earnings years 2009 2008 2007 respectively company 4618 goodwill consolidated balance sheet related 2005 acquisition unocal accounting standard goodwill asc 350 company tested goodwill impairment 2009 concluded impairment necessary events subsequent december 31 2009 evaluated time form 10k filing securities exchange commission february 25 2010 note 25 assets held sale december 31 2009 company reported assets “assets held sale” ahs consolidated balance sheet december 31 2008 252 net properties plant equipment reported ahs assets category related groups service stations aviation facilities lubricants blending plants commercial industrial fuels business assets sold 2009 note 26 earnings per share basic earnings per share eps based upon net income attributable chevron corporation “earnings” less preferred stock dividend requirements includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 20 “stock options sharebased compensation” beginning page fs51 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings fs61 page intentionally left blank fs62 fiveyear financial summary unaudited fs63 supplemental information oil gas producing activities unaudited accordance fasb sec disclosure reporting requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net provedreserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally angola chad nigeria republic congo democratic republic table costs incurred exploration property acquisitions development1 fs64 supplemental information oil gas producing activities table ii capitalized costs related oil gas producing activities congo asia geographic area includes activities principally azerbaijan bangladesh china indonesia kazakhstan myanmar partitioned zone kuwait saudi arabia philippines thailand geographic regions include activities argentina australia brazil canada colombia denmark netherlands norway trinidad tobago venezuela united kingdom countries amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies amounts composed company’s equity interests venezuela angola refer note 12 beginning page fs43 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs65 table ii capitalized costs related oil gas producing activities continued fs66 supplemental information oil gas producing activities table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2009 2008 2007 shown following table net income exploration production activities reported page fs41 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs41 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations includes results producing operations oil sands consolidated heavy oil affiliated result update extractive industries oil gas topic 932 represents accretion aro liability refer note 23 “asset retirement obligations” page fs60 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements geographic presentation conformed 2009 consistent presentation oil gas reserve tables fs67 table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations geographic presentation conformed 2009 consistent presentation oil gas reserve tables includes 10 costs incurred prior assignment proved reserves 2007 represents accretion aro liability refer note 23 “asset retirement obligations” page fs60 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs68 supplemental information oil gas producing activities table iv results operations oil gas producing activities unit prices costs12 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel includes oil sands consolidated heavy oil affiliated result update extractive industries oil gas topic 932 geographic presentation conformed 2009 consistent presentation oil gas reserve tables table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation com pany maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly vice chairman responsible company’s worldwide exploration production activities corporate reserves manager 30 years experience working oil gas industry master’s science petroleum engineering rac members knowledgeable sec guidelines proved reserves classification rac manages activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities provide independent reviews business units’ recommended reserve changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee executive committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board fs69 table v reserve quantity information continued rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination provedreserve records documentation alignment corporate reserves manual summary net oil gas reserves revised oil gas reporting december 2008 sec issued final rule modernization oil gas reporting release nos 338995 3459192 fr78 disclosure requirements final rule became effective company form 10k filing year ending december 31 2009 final rule changes number oil gas reserve estimation disclosure requirements sec regulations sk sx subsequently fasb updated extractive industries oil gas topic 932 align oil gas reserves estimation disclosure requirements sec’s final rule among principal changes final rule requirements use price based 12month average reserve estimation disclosure instead single endofyear price expanding definition oil gas producing activities include nontraditional sources bitumen extracted oil sands permitting use new reliable technologies establish reasonable certainty proved reserves allowing optional disclosure probable possible reserves modifying definition geographic area disclosure reserve estimates production amending disclosures proved reserve quantities include separate disclosures synthetic oil gas expanding proved undeveloped reserves disclosures including discussion proved undeveloped reserves remained undeveloped five years disclosure qualifications chief technical person oversees company’s overall reserves estimation process effect new rules significant effect company’s adopting new guidance inclusion canadian oil sands synthetic oil consolidated companies reserves indicated table v page fs72 additional 460 million boe included yearend 2009 synthetic oil reported affiliated companies represents volumes reclassified heavy crude oil synthetic oil represent additional reserves impracticable estimate remaining impact new rules cost resources required prepare detailed fieldlevel calculations however use 12month average price upward effect reserves related productionsharing variableroyalty contracts 12month average price crude oil fs70 supplemental information oil gas producing activities table v reserve quantity information continued natural gas 2009 lower 2009 yearend spot prices applicable old rules ability use new technologies reserves determination impact reserves significantly reserve additions revisions based conventional technologies proved undeveloped reserve quantities end 2009 proved undeveloped oilequivalent reserves consolidated companies totaled 31 billion barrels approximately 58 percent reserves attributed natural gas half located australia regions crude oil condensate ngls accounted 33 percent total largest concentration reserves africa asia united states synthetic oil accounted balance reserves located canada regions proved undeveloped reserves equity affiliates amounted 13 billion oilequivalent barrels yearend crude oil condensate ngls represented 58 percent total reserves tco affiliate accounting majority amount natural gas represented 26 percent total half reserves tco balance attributed synthetic oil venezuela regions 2009 worldwide proved undeveloped oilequivalent reserves increased 480 million barrels consolidated companies decreased 19 million barrels equity affiliates largest increase consolidated companies regions resulting primarily initial recognition reserves gorgon project australia addition synthetic oil reserves related canadian oil sands adoption new definition oil gas activity proved undeveloped reserves decreased asia africa united states result development drilling activities reclassified reserves proved developed proved undeveloped reserves decreased affiliated companies primarily associated 146 million barrel reclassification proved developed result tco production capacity added completion sour gas injectionsecond generation plant projects sgisgp decrease tco partially offset increased proved undeveloped reserves venezuela angola lng due reservoir performance additional drilling opportunities material downward revisions proved undeveloped reserves consolidated affiliated companies investment convert proved undeveloped proved developed reserves 2009 investments totaling 69 billion made consolidated companies equity affiliates advance development proved undeveloped reserves africa region 25 billion expended various projects including offshore development projects nigeria angola advanced development drilling completion nigerian natural gas processing project asia region expenditures year totaled 15 billion included construction gas processing facility thailand development drilling steamflood project indonesia united states expenditures totaled 17 billion three offshore development projects gulf mexico various smaller development projects regions development expenditures totaled 12 billion variety projects including development activities australia united kingdom year eight major development projects placed service resulted recognition proved developed reserves proved undeveloped reserves 5 years reserves remain proved undeveloped five years result several physical factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels proved undeveloped oilequivalent reserves consolidated affiliated companies totaled 44 billion barrels yearend 2009 total 17 billion barrels corresponds proved undeveloped oilequivalent reserves remained undeveloped five years consolidated companies held approximately 700 million barrels proved undeveloped reserves five years africa approximately 400 million barrels related deepwater projects development asia region held approximately 100 million barrels related compression contract restrictions regions held 100 million barrels related compression projects australia balance relates capacity constraints various projects united states year end affiliated companies held 10 billion barrels proved undeveloped reserves five years tco accounted 800 million oilequivalent barrels reserves primarily related plant capacity limitations balance related capacity limitations synthetic oil project venezuela annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2009 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 35 39 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities december 31 2009 oilequivalent reserves company’s consolidated operations 83 billion barrels refer term “reserves” page e42 definition oilequivalent reserves approximately 22 percent total reserves located fs71 table v reserve quantity information continued united states company’s interests equity affiliates oilequivalent reserves 30 billion barrels 80 percent associated company’s 50 percent ownership tco aside tengiz field tco affiliate single property accounted 5 percent company’s total oilequivalent proved reserves 25 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted approximately percent company’s total proved reserves properties geographically dispersed located united states canada south america west africa middle east southeast asia australia united states total oilequivalent reserves yearend 2009 18 billion barrels california properties accounted approximately 44 percent us reserves classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region contains 22 percent us reserves liquids representing 15 percent reserves production operations mostly offshore result also capital intensive us areas represent remaining 34 percent us reserves evenly split liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection three years ending december 31 2009 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans declines oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved oil natural gas reserves changes thereto years 2007 2008 2009 shown following table page fs74 net proved reserves crude oil condensate natural gas li qui ds synthetic oil fs72 supplemental information oil gas producing activities table v reserve quantity information continued noteworthy amounts categories liquids provedreserve changes 2007 2009 discussed revisions 2007 net revisions decreased reserves 146 million barrels worldwide consolidated companies increased reserves 103 million barrels equity affiliates consolidated companies largest downward net revisions 89 million barrels africa 54 million barrels asia 2008 net revisions increased reserves 536 million barrels worldwide consolidated companies increased reserves 267 million barrels equity affiliates consolidated companies largest increase asia region added 574 million barrels majority increase partitioned zone result concession extension indonesia due lower yearend prices upward revisions also recorded kazakhstan azerbaijan mainly associated effect lower yearend prices calculation reserves associated productionsharing variableroyalty contracts indonesia reserves increased due mainly impact lower yearend prices reserve calculations productionsharing contracts well result development drilling improved waterflood steamflood performance increases offset downward revisions united states regions affiliated companies 249 millionbarrel increase tco due effect lower yearend prices royalty determination facility optimization tengiz korolev fields 2009 net revisions increased reserves 355 million barrels worldwide consolidated companies decreased reserves 187 million barrels equity affiliates consolidated companies largest increase 460 million barrels regions due inclusion synthetic oil related canadian oil sands united states reserves increased 63 million barrels result development drilling performance revisions increases partially offset decreases 121 million barrels asia 46 million barrels africa asia decreases indonesia azerbaijan driven effect higher 12month average prices calculation reserves associated productionsharing contracts effect reservoir performance revisions africa reserves nigeria declined result higher prices productionsharing contracts reservoir performance affiliated companies tco declined 184 millionbarrels primarily due effect higher 12month average prices royalty determination affiliated companies 266 million barrels heavy crude oil reclassified synthetic oil activities venezuela improved recovery 2007 improved recovery increased liquids volumes 20 million barrels worldwide addition individually significant 2008 improved recovery increased worldwide liquids volumes 37 million barrels consolidated companies largest addition asia region related gas reinjection kazakhstan affiliated companies increased reserves 10 million barrels due improved secondary recovery boscan 2009 improved recovery increased liquids volumes 86 million barrels worldwide consolidated companies accounted 50 million barrels largest addition related improved secondary recovery nigeria affiliated companies increased reserves 36 million barrels due improvements related tco sgisgp facilities extensions discoveries 2007 extensions discoveries increased liquids volumes 60 million barrels worldwide largest additions 36 million barrels united states mainly deepwater tahiti mad dog fields gulf mexico 2008 extensions discoveries increased consolidated company reserves 33 million barrels worldwide united states increased reserves 17 million barrels primarily gulf mexico africa asia regions increased reserves 16 million barrels one country resulting additions greater 5 million barrels 2009 extensions discoveries increased liquids volumes 52 million barrels worldwide largest additions 33 million barrels regions related gorgon project australia delineation drilling argentina africa united states accounted 10 million barrels 6 million barrels respectively purchases 2007 acquisitions 316 million barrels equity affiliates related formation new hamaca equity affiliate venezuela sales 2007 affiliated company sales 432 million barrels related dissolution hamaca equity affiliate venezuela fs73 table v reserve quantity information continued net proved reserves natural gas noteworthy amounts categories natural gas provedreserve changes 2007 2009 discussed revisions 2007 net revisions increased reserves consolidated companies 395 bcf increased reserves affiliated companies 73 bcf consolidated companies net increases 346 bcf asia 209 bcf united states partially offset downward revisions 160 bcf africa regions asia region drilling activities thailand added 360 bcf partially offset downward revisions azerbaijan kazakhstan due impact higher prices united states improved reservoir performance many fields contributed increase largest portion midcontinent areas decreases africa primarily due 136 bcf downward revision nigeria resulting field performance regions net downward revisions 19 bcf 185 bcf downward revision australia due drilling results smaller declines mostly offset improved reservoir performance trinidad tobago added 188 bcf tco upward revision 75 bcf associated improved reservoir performance development activities upward revision net negative impact due higher yearend prices royalty determination 2008 net revisions increased reserves consolidated companies 1166 bcf increased reserves affiliated companies 1130 bcf asia region positive revisions totaled 1073 bcf consolidated companies almost half increase attributed karachaganak field kazakhstan due mainly effects low yearend prices productionsharing contract results development drilling improved recovery large upward revisions recorded pattani field thailand due successful drilling campaign tco affiliate kazakhstan increase 498 bcf reflected impacts lower yearend prices royalty determination facility optimization reserves associated fs74 supplemental information oil gas producing activities angola lng project accounted majority 632 bcf increase affiliated companies 2009 net revisions increased reserves 569 bcf consolidated companies decreased reserves 44 bcf affiliated companies consolidated companies net increases 493 bcf asia primarily result reservoir studies bangladesh development drilling thailand results partially offset downward revision due impact higher prices productionsharing contracts myanmar united states regions increased reserves 39 bcf 33 bcf respectively united states development drilling gulf mexico partially offset performance revisions california midcontinent areas regions improved reservoir performance compression australia partially offset effect higher prices productionsharing contracts trinidad equity affiliates downward revision 237 bcf tco due effect higher prices royalty determination increase gas injection sgisgp facilities decline partially offset performance drilling opportunities related angola lng project extensions discoveries 2007 extensions discoveries accounted increase 518 bcf worldwide largest addition 330 bcf bangladesh result drilling activities additions individually significant 2009 worldwide extensions discoveries 4387 bcf attributed consolidated companies gorgon project australia accounted essentially 4277 bcf additions regions asia development drilling thailand accounted majority increase united states delineation drilling california accounted majority increase purchases 2007 purchases natural gas reserves 141 bcf consolidated companies include acquisition additional interest bibiyana field bangladesh affiliated company purchases 211 bcf related formation new hamaca equity affiliate venezuela initial booking related angola lng project sales 2007 sales 76 bcf 175 bcf consolidated companies equity affiliates respectively affiliated company sales related dissolution hamaca equity affiliate venezuela 2009 worldwide sales 117 bcf related consolidated companies regions sale properties argentina accounted 84 bcf sale properties gulf mexico accounted majority 33 bcf decrease united states table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fasb estimated future cash inflows production computed applying 12 monthaverage prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations arbitrary valuation prescribed fasb requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs75 table vi standardized measure discounted future net cash flows related proved oil gas reserves continued fs76 supplemental information oil gas producing activities table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs77 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes section 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sections financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 38 schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 15 consolidated financial statements beginning page fs43 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 23rd day february 2012 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 23rd day february 2012 principal executive officers directors sjohn watson john watson chairman board chief executive officer linnet f deily linnet f deily sgeorge l kirkland george l kirkland vice chairman board robert e denham robert e denham robert j eaton robert j eaton chuck hagel chuck hagel principal financial officer spatricia e yarrington patricia e yarrington vice president chief financial officer principal accounting officer smatthew j foehr matthew j foehr vice president comptroller enrique hernandez jr enrique hernandez jr donald b rice donald b rice kevin w sharer kevin w sharer charles r shoemate charles r shoemate john g stumpf john g stumpf slydia beebe lydia beebe attorneyinfact ronald sugar ronald sugar carl ware carl ware financial table contents fs2 management’s discussion analysis financial condition results operations key financial results fs2 earnings major operating area fs2 business environment outlook fs2 operating developments fs5 results operations fs6 consolidated statement income fs8 selected operating data fs10 liquidity capital resources fs10 financial ratios fs12 guarantees offbalancesheet arrangements contractual obligations contingencies fs12 financial derivative instruments fs13 transactions related parties fs14 litigation contingencies fs14 environmental matters fs15 critical accounting estimates assumptions fs16 new accounting standards fs19 quarterly results stock market data fs20 fs22 consolidated financial statements report management fs21 report independent registered public accounting firm fs22 consolidated statement income fs23 consolidated statement comprehensive income fs24 consolidated balance sheet fs25 consolidated statement cash flows fs26 consolidated statement equity fs27 fs29 fs1 management’s discussion analysis financial condition results operations key financial results refer “results operations” section beginning page fs6 discussion financial results major operating area three years ended december 31 2011 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark indonesia kazakhstan myanmar netherlands nigeria norway partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend mostly profitability upstream downstream business segments single biggest factor affects results operations company movement price crude oil downstream business crude oil largest cost component refined products seasonality primary driver changes company’s quarterly earnings year sustain longterm competitive position upstream business company must develop replenish inventory projects offer attractive financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states time certain governments sought renegotiate contracts impose additional costs company governments may attempt future civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries company also continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning page fs6 discussions net gains asset sales 2011 asset dispositions restructurings may also occur future periods could result significant gains losses company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof fs2 may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control external factors include general level inflation also commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest chart shows trend benchmark prices west texas intermediate wti crude oil brent crude oil us henry hub natural gas wti price averaged 95 per barrel fullyear 2011 compared 79 2010 midfebruary 2012 wti price 99 per barrel brent price averaged 111 per barrel fullyear 2011 compared 80 2010 midfebruary 2012 brent price 118 per barrel majority company’s equity crude production priced based brent benchmark wti traded discount brent throughout 2011 due excess crude supply us midcontinent market discount narrowed fourth quarter 2011 crude inventories declined differential crude oil prices exists high quality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated supply heavy crude available versus demand function capacity refineries able process lower quality feedstock light products motor gasoline jet fuel aviation gasoline diesel fuel differential widened 2011 primarily due rising diesel prices lower availability light sweet crude oil due supply disruptions libya chevron produces shares production heavy crude oil california chad indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs10 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets united states prices henry hub averaged 400 per thousand cubic feet mcf 2011 compared 450 2010 midfebruary 2012 henry hub spot price 250 per mcf fluctuations price natural gas united states closely associated customer demand relative volumes produced north america outside united states price changes natural gas depend wide range supply demand regulatory circumstances locations chevron investing longterm projects install infrastructure produce liquefy natural gas transport tanker markets international natural gas realizations averaged 540 per mcf 2011 compared 460 per mcf 2010 see page fs10 company’s average natural gas realizations us international regions fs3 management’s discussion analysis financial condition results operations company’s worldwide net oilequivalent production 2011 averaged 2673 million barrels per day onefifth company’s net oilequivalent production 2011 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait opec quotas effect company’s net crude oil production 2011 2010 december 2011 meeting members opec supported maintaining current production level 30 million barrels per day made change production quotas effect since december 2008 company estimates oilequivalent production 2012 average approximately 2680 million barrels per day based average brent price 111 per barrel fullyear 2011 estimate subject many factors uncertainties including quotas may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays project startups fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states refer “results operations” section pages fs6 fs7 additional discussion company’s upstream business refer table v beginning page fs67 tabulation company’s proved net oil gas reserves geographic area beginning 2009 yearend 2009 2011 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2011 early november 2011 drilling development well deepwater frade field brazil unanticipated pressure spike caused oil migrate well bore series fissures sea floor emitting approximately 2400 barrels oil resulting surface sheen since dissipated coastal wildlife impacts upon detection company immediately took steps stop release chevron’s emergency plan approved brazilian environment natural resources regulatory agency ibama implemented according law industry standards source seep contained within four days december 31 2011 financial impact incident material company’s annual net income however company’s ultimate exposure related fines penalties currently determinable could significant net income one period downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast asia southern africa chevron operates significant ownership interests refineries areas 2011 company’s margins improved 2010 supported higher global product demand tighter global refined product supplies company made progress 2011 implementing previouslyannounced restructuring downstream businesses including employeereduction programs united states international operations approximately 2300 employees downstream operations currently expected released programs 2100 employees released december 31 2011 programs substantially completed substantially remaining employees designated release programs expected leave 2012 900 affected employees located united states refer note 23 consolidated financial statements pages fs55 fs56 discussion fs4 company progressed ongoing effort concentrate downstream resources capital strategic assets august 1 2011 company completed sale 220000barrelperday pembroke refinery fuels marketing aviation assets united kingdom ireland yearend 2011 company also completed sale 13 us terminals certain marketing businesses africa lpg storage distribution operations china fuels marketing aviation businesses 16 countries caribbean latin america regions 2012 company also expects complete sale fuels finished lubricants aviation businesses spain certain fuels marketing aviation businesses central caribbean pending customary regulatory approvals also 2011 caltex australia ltd cal company’s 50 percentowned affiliate initiated review refining operations australia ongoing upon completion review result decision significantly alter operational role cal’s refineries chevron may recognize loss could significant net income one period refer “results operations” section pages fs7 fs8 additional discussion company’s downstream operations consists mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology companies first quarter 2010 employeereduction programs announced corporate staffs 2011 yearend 400 employees corporate staffs released programs refer note 23 consolidated financial statements beginning page fs55 discussion operating developments key operating developments events 2011 early 2012 included following upstream australia chevron jointventure partners reached final investment decision proceed development wheatstone project construction started late 2011 chevron holds 721 percent interest foundation natural gas processing facilities located ashburton north along northwest coast australia company plans supply natural gas foundation project chevronoperated 902 percentowned wheatstone iago fields lng facilities also destination thirdparty natural gas end 2011 chevron signed binding sales purchase agreements two asian customers delivery 60 percent chevron’s net lng offtake wheatstone project discussions continue potential customers increase sales 85 90 percent chevron’s net lng offtake sell equity 2011 company announced natural gas discoveries 50 percentowned operated orthrus deep prospect block wa24r 50 percentowned operated vos prospect block wa439p 67 percent owned operated acme west prospect block wa205p january 2012 company also announced natural gas discovery 50 percentowned operated satyr3 prospect block wa374p discoveries expected contribute potential expansion companyoperated lng projects kazakhstanrussia 2011 caspian pipeline consortium began construction project increase pipeline design capacity 670000 barrels per day project expected implemented three phases capacity increasing progressively reaching maximum capacity 14 million barrels per day 2016 nigeria december 2011 final investment decision reached develop 40 percentowned operated sonam natural gas field escravos area project designed deliver 215 million cubic feet natural gas per day domestic market produce 30000 barrels liquids per day thailand october 2011 699 percentowned operated platong ii natural gas project commenced production project ramped total average daily production 377 million cubic feet natural gas 11000 barrels condensate end 2011 united kingdom fourth quarter 2011 company reached final investment decision clair ridge project located west shetland islands chevron 194 percent nonoperated working interest project united states fourth quarter 2011 final investment decision made tubular bells project deepwater gulf mexico development includes 429 percent nonoperated working interest tubular bells unitized area drilling operations 438 percentowned operated moccasin prospect resulted new discovery crude oil company also drilled successful appraisal well 55 percentowned buckskin prospect prospects deepwater gulf mexico february 2011 chevron acquired atlas energy inc acquisition provided natural gas resource position marcellus shale utica shale primarily located southwestern pennsylvania ohio acquisition also provided 49 percent interest laurel mountain midstream llc affiliate owns 1000 miles natural gas gathering lines servicing marcellus addition acquisition provided assets michigan include antrim shale producing assets approximately fs5 management’s discussion analysis financial condition results operations 350000 total acres antrim collingwoodutica shale formations additional asset acquisitions 2011 expanded company’s holdings marcellus utica approximately 700000 600000 total acres respectively downstream africa 2011 company completed sale certain marketing businesses five countries africa caribbean latin america 2011 company completed sale fuels marketing aviation businesses 16 countries caribbean latin america fourth quarter 2011 company signed agreements sell certain fuels marketing aviation businesses central caribbean company expects complete sales 2012 following receipt required local regulatory government approvals europe august 2011 company completed sale refining marketing assets united kingdom ireland including pembroke refinery singapore february 2012 company reached final investment decision significantly increase capacity existing additives plant singapore united states january 2011 company announced final investment decision 14 billion project construct base oil manufacturing facility pascagoula mississippi refinery facility expected produce approximately 25000 barrels per day premium base oil common stock dividends quarterly common stock dividend increased 83 percent april 2011 38 percent october 2011 081 per common share making 2011 24th consecutive year company increased annual dividend payment common stock repurchase program company purchased 425 billion common stock 2011 share repurchase program began 2010 set term monetary limits results operations major operating areas following section presents results operations company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 11 beginning page fs37 discussion company’s “reportable segments” defined accounting standards segment reporting accounting standards codification asc 280 section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream us upstream earnings 651 billion 2011 increased 24 billion 2010 benefit higher crude oil realizations increased earnings 28 billion periods partly offsetting effect lower net oilequivalent production decreased earnings 400 million higher operating expenses 200 million us upstream earnings 41 billion 2010 increased 19 billion 2009 higher prices crude oil natural gas increased earnings 21 billion periods partly offsetting effects higher operating expenses 200 million part due gulf mexico drilling moratorium lower exploration expenses essentially offset higher tax items higher depreciation expenses company’s average realization us crude oil natural gas liquids 2011 9751 per barrel compared 7159 2010 5436 2009 average natural gas realization 404 per thousand cubic feet 2011 compared 426 373 2010 2009 respectively net oilequivalent production 2011 averaged 678000 barrels per day 4 percent 2010 5 percent 2009 2011 2010 decrease production associated normal field declines maintenancerelated downtime partially offsetting decrease new production acquisitions marcellus shale increases perdido project gulf mexico natural field declines 2010 2009 fs6 mostly offset increased production tahiti field net liquids component oilequivalent production 2011 averaged 465000 barrels per day 5 percent 2010 4 percent 2009 net natural gas production averaged 13 billion cubic feet per day 2011 approximately 3 percent 2010 9 percent 2009 refer “selected operating data” table page fs10 threeyear comparative production volumes united states international upstream international upstream earnings 183 billion 2011 increased 47 billion 2010 higher prices crude oil increased earnings 71 billion benefit partly offset higher tax items 17 billion higher operating expenses including fuel 10 billion foreign currency effects increased earnings 211 million 2011 compared decrease 293 million year earlier earnings 136 billion 2010 increased 49 billion 2009 higher prices crude oil natural gas increased earnings 43 billion increase net oilequivalent production 2010 period benefited income 12 billion net benefit partly offset higher operating expenses 500 million favorable change tax items 450 million mostly offset higher depreciation expenses 2009 period included gains 500 million asset sales tax items related gorgon project australia foreign currency effects decreased earnings 293 million 2010 period compared reduction 578 million year earlier primarily reflecting noncash losses balance sheet remeasurement company’s average realization international crude oil natural gas liquids 2011 10153 per barrel compared 7268 2010 5597 2009 average natural gas realization 539 per thousand cubic feet 2011 compared 464 401 2010 2009 respectively international net oilequivalent production 20 million barrels per day 2011 decreased 3 percent 2010 remained relatively flat 2009 volumes 2011 2010 include synthetic oil reported 2009 production oil sands canada absent price effects entitlement volumes net oilequivalent production decreased 1 percent 2011 increased 5 percent 2010 compared prior year’s production net liquids component international oilequivalent production 14 million barrels per day 2011 decrease approximately 3 percent 2010 increase approximately 2 percent 2009 international net natural gas production 37 billion cubic feet per day 2011 2 percent 2010 2 percent 2009 refer “selected operating data” table page fs10 threeyear comparative international production volumes us downstream us downstream operations earned 15 billion 2011 compared 13 billion 2010 earnings benefited 300 million improved margins refined products 200 million higher earnings 50 percentowned chevron phillips chemical company llc cpchem 50 million absence 2010 charges related employee reductions benefits partly offset absence 400 million gain sale company’s ownership interest colonial pipeline company recognized 2010 earnings increased 15 billion 2010 2009 improved margins refined products increased earnings 550 million also contributing increase nearly 400 million gain sale company’s ownership interest colonial pipeline company higher earnings chemicals operations increased earnings 300 million largely improved margins cpchem refined product sales 126 million barrels per day 2011 declined 7 percent mainly due lower gasoline gas oil kerosene sales volumes refined products 135 million barrels per day 2010 decrease 4 percent 2009 decline mainly gasoline jet fuel sales us branded gasoline sales decreased 514000 barrels per day 2011 representing approximately 10 percent 17 percent declines 2010 2009 respectively decline 2011 relative 2010 2009 primarily fs7 management’s discussion analysis financial condition results operations due weaker demand previously completed exits selected eastern us retail markets refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 21 billion 2011 compared 11 billion 2010 gains asset sales benefited earnings 700 million primarily sale pembroke refinery related marketing assets united kingdom ireland also contributing earnings improved margins 200 million absence 2010 charges 90 million related employee reductions benefits partly offset unfavorable marktomarket effects derivative instruments 180 million foreign currency effects decreased earnings 65 million 2011 compared decrease 135 million year earlier earnings 11 billion 2010 increased 545 million 2009 higher margins manufacture sale gasoline refined products increased earnings 10 billion favorable swing marktomarket effects derivative instruments benefited earnings 300 million partially offsetting items absence 2009 gains asset sales 550 million higher expenses 200 million primarily related employee reductions transportation costs foreign currency effects reduced earnings 135 million 2010 compared reduction 191 million 2009 total refined product sales 169 million barrels per day 2011 declined 4 percent primarily due sale company’s refining marketing assets united kingdom ireland excluding impact 2011 asset sales volumes 3 percent comparative periods international refined product sales volumes 176 million barrels per day 2010 5 percent lower 2009 mainly due asset sales certain countries africa latin america refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refinery input volumes includes mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology companies net charges 2011 increased 351 million 2010 mainly due higher expenses employee compensation benefits higher net corporate tax expenses net charges 2010 increased 209 million 2009 mainly due higher expenses employee compensation benefits higher corporate tax expenses partly offset lower provisions environmental remediation sites previously closed sold consolidated statement income comparative amounts certain income statement categories shown sales operating revenues increased 2011 mainly due higher prices crude oil refined products higher 2010 prices resulted increased revenues compared 2009 income equity affiliates increased 2011 2010 mainly due higher upstreamrelated earnings tengizchevroil tco kazakhstan result higher prices crude oil downstreamrelated earnings also higher comparative periods primarily due higher earnings cpchem result higher margins sales commodity chemicals income equity affiliates increased 2010 2009 largely due higher upstreamrelated earnings fs8 tco kazakhstan petropiar venezuela principally related higher prices crude oil increased crude oil production downstreamrelated affiliate earnings also higher comparative periods primarily due higher earnings cpchem result higher margins sales commodity chemicals improved margins refined products favorable swing foreign currency effects gs caltex south korea also contributed increase downstream affiliate earnings 2010 period refer note 12 beginning page fs39 discussion chevron’s investments affiliated companies income 20 billion 2011 included net gains approximately 15 billion asset sales income 2010 2009 included net gains asset sales 11 billion 13 billion respectively interest income approximately 145 million 2011 120 million 2010 95 million 2009 foreign currency effects increased income 103 million 2011 decreasing income 251 million 466 million 2010 2009 respectively crude oil product purchases 2011 2010 increased 335 billion 168 billion prior years due higher prices crude oil natural gas refined products operating selling general administrative expenses increased 24 billion 2011 2010 increase primarily related higher fuel expenses 15 billion higher employee compensation benefits 700 million part increased fuel purchases reflected new commercial arrangement replaced prior product exchange agreement upstream operations indonesia total expenses 2010 16 billion higher 2009 primarily due 600 million higher fuel expenses 500 million employee compensation benefits 200 million increased construction repair maintenance expense increase 200 million associated higher tanker charter rates addition charges 234 million related employee reductions included 2010 period exploration expenses 2011 increased 2010 mainly due higher geological geophysical costs partly offset lower well writeoffs exploration expenses 2010 declined 2009 mainly due lower amounts geological geophysical costs well writeoffs decrease 2011 2010 mainly reflected lower production levels sale pembroke refinery partially offset higher depreciation rates certain oil gas producing fields increase 2010 2009 largely due higher depreciation rates higher production certain oil gas fields partly offset lower impairments taxes income decreased 2011 2010 primarily due lower import duties united kingdom reflecting sale pembroke refinery downstream assets partly offset higher excise taxes company’s south africa downstream operations taxes income increased 2010 2009 mainly due higher excise taxes canada united kingdom interest debt expense net capitalized interest decreased 2011 2010 due lower average effective interest rates increase 2010 2009 primarily due slightly higher average effective interest rates effective income tax rates 43 percent 2011 40 percent 2010 43 percent 2009 rate higher 2011 2010 primarily due higher effective tax rates certain international upstream jurisdictions higher international upstream effective tax rates driven primarily lower utilization nonus tax credits 2011 effect changes income tax rates periods partially offset foreign currency remeasurement impacts rate lower 2010 2009 primarily due international upstream effects including increased utilization tax credits greater impact rate onetime deferred tax benefits relatively low tax rates asset sales 2009 also smaller portion company income earned higher tax rate international upstream jurisdictions 2010 2009 finally foreign currency remeasurement impacts caused reduction effective tax rate periods fs9 management’s discussion analysis financial condition results operations selected operating data12 includes company share equity affiliates mbpd thousands barrels per day mmcfpd millions cubic feet per day mboepd thousands barrels oilequivalents per day bbl barrel mcf thousands cubic feet oilequivalent gas oeg conversion ratio 6000 cubic feet natural gas 1 barrel oil includes natural gas consumed operations mmcfpd united states international 4 includes canada synthetic oil venezuela affiliate synthetic oil 5 includes canada oil sands 6 includes branded unbranded gasoline 7 includes sales affiliates mbpd liquidity capital resources cash equivalents time deposits marketable securities total balances 201 billion 171 billion december 31 2011 2010 respectively cash provided operating activities 2011 411 billion compared 314 billion 2010 194 billion 2009 cash provided operating activities net contributions employee pension plans approximately 15 billion 14 billion 17 billion 2011 2010 2009 respectively cash provided operating activities 2011 sufficient fund 274 billion cash component company’s capital exploratory program pay 61 billion dividends shareholders addition company completed 45 billion acquisition atlas energy inc funded company’s operating cash flows cash provided investing activities included proceeds deposits related asset sales 35 billion 2011 20 billion 2010 26 billion 2009 restricted cash 12 billion 855 million associated various capitalinvestment projects acquisitions pending tax deferred exchanges upstream abandonment activities december 31 2011 2010 respectively invested shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet dividends paid common stockholders approximately 61 billion 2011 57 billion 2010 53 billion 2009 october 2011 company increased quarterly dividend 38 percent 81 cents per common share followed increase 83 percent announced second quarter 2011 fs10 capital exploratory expenditures excludes acquisition atlas energy inc 2011 debt capital lease obligations total debt capital lease obligations 102 billion december 31 2011 115 billion yearend 2010 13 billion decrease total debt capital lease obligations 2011 included early redemption 15 billion bond due mature march 2012 company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 59 billion december 31 2011 compared 56 billion yearend 2010 amounts 56 billion 54 billion reclassified longterm end period respectively yearend 2011 settlement obligations expected require use working capital 2012 company intent ability evidenced committed credit facilities refinance longterm basis december 31 2011 company 60 billion committed credit facilities various major banks expiring december 2016 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2011 addition company automatic shelf registration statement expires march 2013 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation chevron corporation profit sharingsavings plan trust fund texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s pl moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements company also modify capital spending plans extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals provide flexibility continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits company expects repurchase 500 million 2 billion common shares per quarter prevailing prices permitted securities laws legal requirements subject market conditions factors 2011 company purchased 423 million common shares 425 billion inception program 2011 company purchased 511 million shares 50 billion capital exploratory expenditures total expenditures 2011 291 billion including 17 billion company’s share equityaffiliate expenditures 2010 2009 expenditures 218 billion 222 billion respectively including company’s share affiliates’ expenditures 14 billion 16 billion respectively 291 billion expenditures 2011 89 percent 259 billion related upstream activities approximately 87 percent 80 percent expended upstream operations 2010 2009 international upstream accounted 68 percent worldwide upstream investment 2011 82 percent 2010 80 percent 2009 amounts exclude acquisition atlas energy inc 2011 company estimates 2012 capital exploratory expenditures 327 billion including 30 billion spending fs11 management’s discussion analysis financial condition results operations affiliates approximately 87 percent total 285 billion budgeted exploration production activities approximately 223 billion 78 percent amount projects outside united states spending 2012 primarily focused major development projects angola australia brazil canada china kazakhstan nigeria russia united kingdom us gulf mexico also included funding enhancing recovery mitigating natural field declines currentlyproducing assets focused exploration appraisal activities worldwide downstream spending 2012 estimated 36 billion 21 billion projects united states major capital outlays include projects construction refineries united states south korea expansion additives production capacity singapore chemicals projects united states saudi arabia investments technology power generation corporate businesses 2012 budgeted 600 million noncontrolling interests company noncontrolling interests 799 million 730 million december 31 2011 2010 respectively distributions noncontrolling interests totaled 71 million 72 million 2011 2010 respectively pension obligations information related pension plan contributions included page fs54 note 21 consolidated financial statements heading “cash contributions benefit payments” refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs16 financial ratios financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2011 book value inventory lower replacement costs based average acquisition costs year approximately 90 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2011 higher 2010 2009 due higher beforetax income debt ratio total debt percentage total debt plus chevron corporation stockholders’ equity indicates company’s leverage decrease 2011 2010 due lower debt higher chevron corporation stockholders’ equity balance decrease 2010 2009 due higher chevron corporation stockholders’ equity balance guarantees offbalancesheet arrangements contractual obligations contingencies direct guarantee company’s guarantee approximately 600 million associated certain payments terminal use agreement entered company affiliate terminal commenced operations third quarter 2011 approximate 16year term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications information related indemnifications included page fs56 note 24 consolidated financial statements heading “indemnifications” longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ fs12 financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2012 60 billion 2013 40 billion 2014 39 billion 2015 32 billion 2016 19 billion 2017 74 billion portion commitments may ultimately shared project partners total payments agreements approximately 66 billion 2011 65 billion 2010 81 billion 2009 following table summarizes company’s significant contractual obligations contractual obligations1 excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 21 beginning page fs49 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect results operations consolidated financial position liquidity single period 56 billion shortterm debt company expects refinance included long term debt repayment schedule reflects projected repayment entire amounts 20132014 period include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices financial derivative instruments market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2011 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions pur chase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2011 company’s market exposure positions monitored managed daily basis internal risk control group accordance company’s risk management policies approved audit committee company’s board directors derivative commodity instruments used company’s risk management trading activities consist mainly futures options swap contracts traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition crude oil natural gas refined product swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet accordance accounting standards derivatives asc 815 resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2011 quarterly average increase 22 million total assets quarterly average decrease 17 million total liabilities company uses valueatrisk var model estimate potential loss fair value single day effect adverse changes market conditions derivative commodity instruments held issued var maximum projected loss exceeded within given probability confidence level given period time company’s var model uses monte carlo simulation method involves generating hypothetical scenarios specified probability distributions constructing full distribution portfolio’s potential values var model utilizes exponentially weighted moving average computing historical volatilities correlations 95 percent confidence level oneday holding period company’s 95 percent oneday var corresponds unrealized loss portfolio value would exceeded average one every 20 trading days portfolio held constant one day oneday holding period based assumption marketrisk positions liquidated hedged within one day hedging risk management company uses conventional exchangetraded instruments futures options well nonexchangetraded swaps liquidated hedged effectively within one day following table presents 95 percentoneday var company’s primary risk exposures area derivative commodity instruments december 31 2011 2010 fs13 management’s discussion analysis financial condition results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2011 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2011 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” note 12 consolidated financial statements page fs40 discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page fs41 note 14 consolidated financial statements heading “mtbe” ecuador information related ecuador matters included note 14 consolidated financial statements heading “ecuador” beginning page fs41 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws included 1404 million yearend 2011 reserve balance remediation activities approximately 180 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2011 185 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity fs14 remaining yearend 2011 environmental reserves balance 1219 million 675 million related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 544 million associated various sites international downstream 95 million upstream 368 million businesses 81 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2011 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 128 billion asset retirement obligations yearend 2011 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 25 page fs58 related company’s asset retirement obligations discussion “environmental matters” beginning page fs15 suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions december 31 2011 company approximately 24 billion suspended exploratory wells included properties plant equipment decrease 284 million 2010 balance reflected increase 283 million 2009 future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 24 billion suspended wells yearend 2011 uncertain pending future activities including normal project evaluation additional drilling refer note 19 beginning page fs47 additional discussion suspended wells income taxes information related income tax contingencies included pages fs43 fs45 note 15 page fs56 note 24 consolidated financial statements heading “income taxes” contingencies information related contingencies included pages fs57 fs58 note 24 consolidated financial statements heading “other contingencies” environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2011 approximately 27 billion consolidated companies included expenditures approximately 10 billion environmental capital expenditures 17 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2012 total worldwide environmental capital expenditures estimated 10 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites fs15 management’s discussion analysis financial condition results operations possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation crude oil natural gas reserves sec rules require ” analysis geosciences engineering data reserves estimated reasonable certainty economi cally producible existing economic conditions” existing economic conditions include prices based average price 12month period prior end reporting period refer table v “reserve quantity information” beginning page fs67 changes estimates three years ending december 31 2011 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs76 estimates provedreserve values three years ended december 31 2011 note 1 consolidated financial statements beginning page fs28 includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment properties plant equipment investments affiliates” beginning page fs18 includes reference conditions downward revisions provedreserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs28 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 21 beginning page fs49 includes information funded status company’s pension opeb plans end 2011 2010 components pension opeb expense three years ended december 31 2011 underlying assumptions periods fs16 pension opeb expense reported consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments yearend 2011 2010 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet differences related overfunded pension plans reported longterm asset “deferred charges assets” differences associated underfunded unfunded pension opeb plans reported “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense reported “accumulated comprehensive loss” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies expected longterm rate return us pension plan assets account 70 percent company’s pension plan assets remained 78 percent since 2002 10 years ending december 31 2011 actual asset returns averaged 50 percent plan actual return 2011 slightly negative associated broad decline financial markets second half year additionally exception two years within 10 year period actual asset returns plan equaled exceeded 78 percent yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2011 company selected 38 percent discount rate major us pension plan 40 percent opeb plan rates selected based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2011 discount rates end 2010 2009 48 percent 53 percent respectively major us pension plan 50 percent 58 percent respectively company’s us opeb plan increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2011 12 billion indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2011 approximately 75 million 1 percent increase discount rate plan accounted 63 percent companywide pension obligation would reduced total pension plan expense 2011 approximately 145 million increase discount rate would decrease pension obligation thus changing funded status plan reported consolidated balance sheet aggregate funded status recognized consolidated balance sheet december 31 2011 net liability approximately 54 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 375 million would decreased plan’s underfunded status approximately 25 billion 21 billion plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2011 company’s pension plan contributions 15 billion including 12 billion us plans 2012 company estimates contributions approximately 900 million actual contribution amounts dependent upon investment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2011 220 million total liability reflected unfunded status plans end 2011 38 billion indication discount rate sensitivity determination opeb expense 2011 1 percent increase discount rate company’s primary us opeb plan accounted 76 percent companywide opeb expense would decreased opeb expense approximately 10 million 025 percent increase discount rate plan accounted 81 percent companywide opeb liabilities would decreased total opeb liabilities end 2011 approximately 75 million main us postretirement medical plan annual increase company contributions limited 4 percent per year active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 8 percent 2012 gradually drop 5 percent 2023 beyond indication health care costtrend rate sensitivity determination opeb expense 2011 1 percent increase rates main us opeb plan accounted 81 percent companywide opeb liabilities would increased opeb expense 8 million fs17 management’s discussion analysis financial condition results operations differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 21 beginning page fs49 information 96 billion beforetax actuarial losses recorded company december 31 2011 description method used amortize costs estimate costs recognized expense 2012 impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 9 beginning page fs34 major individual impairments ppe investments recorded three years ending december 31 2011 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons fs18 example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 15 beginning page fs43 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2011 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 18 page fs47 notes consolidated financial statements information regarding new accounting standards fs19 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx february 13 2012 stockholders record numbered approximately 178000 restrictions company’s ability pay dividends fs20 management’s responsibility financial statements stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2011 effectiveness company’s internal control financial reporting december 31 2011 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein john watson patricia e yarrington matthew j foehr chairman board vice president vice president chief executive officer chief financial officer comptroller february 23 2012 fs21 report independent registered public accounting firm stockholders board directors chevron corporation opinion accompanying consolidated balance sheet related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 2011 december 31 2010 results operations cash flows three years period ended december 31 2011 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2011 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate san francisco california february 23 2012 fs22 consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs23 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs24 consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs25 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs26 consolidated statement equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs27 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations relate primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses additives fuels lubricant oils company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories generally stated average cost fs28 note 1 summary significant accounting policies continued properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page fs47 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 9 beginning page fs34 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 25 page fs58 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 25 page fs58 discussion company’s aros fs29 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies continued federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs23 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation employees accounts transactions accounting standards sharebased compensation asc 718 equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 acquisition atlas energy inc february 17 2011 company acquired atlas energy inc atlas held one premier acreage positions marcellus shale concentrated southwestern pennsylvania aggregate purchase price atlas approximately 4500 included 3009 cash common shares atlas 403 cash advance facilitate atlas’ purchase 49 percent interest laurel mountain midstream llc 1100 assumed debt subsequent close transaction company paid assumed debt made payments 184 connection atlas equity awards part acquisition chevron assumed terms carry arrangement whereby reliance marcellus llc funds 75 percent chevron’s drilling costs 1300 acquisition accounted business combination asc 805 among things requires assets acquired liabilities assumed measured acquisition date fair values provisional fair value measurements made first quarter 2011 acquired assets assumed liabilities measurement process finalized fourth quarter 2011 proforma financial information presented would materially different information presented consolidated statement income following table summarizes measurement assets acquired liabilities assumed fs30 note 2 acquisition atlas energy inc continued properties measured primarily using income approach fair values acquired oil gas properties based significant inputs observable market thus represent level 3 measurements refer note 9 beginning page fs34 definition fair value hierarchy levels significant inputs included estimated resource volumes assumed future production profiles estimated future commodity prices discount rate 8 percent assumptions timing amount future operating development costs properties united states included upstream segment acquisition date fair value consideration transferred 3400 cash 27 goodwill assigned upstream segment represents amount consideration transferred excess values assigned individual assets acquired liabilities assumed goodwill represents future economic benefits arising assets acquired could individually identified separately recognized none goodwill deductible tax purposes goodwill recorded acquisition subject amortization tested periodically impairment required applicable accounting standard asc 350 note 3 noncontrolling interests company adopted accounting standard noncontrolling interests asc 810 consolidated financial statements effective january 1 2009 retroactive earliest period presented ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” activity equity attributable noncontrolling interests 2011 2010 2009 follows note 4 information relating consolidated statement cash flows accordance accounting standards cashflow classifications stock options asc 718 “net decrease increase operating working capital” includes reductions 121 67 25 excess income tax benefits associated stock options exercised 2011 2010 2009 respectively amounts offset equal amount “net purchases sales treasury shares” “acquisition atlas energy” reflects 3009 cash paid common shares atlas “advance atlas energy” 403 made facilitate purchase 49 percent interest laurel mountain midstream llc day closing “net decrease increase operating working capital” includes 184 payments made connection atlas equity awards subsequent acquisition refer note 2 beginning page fs30 additional discussion atlas acquisition fs31 notes consolidated financial statements millions dollars except pershare amounts note 4 information relating consolidated statement cash flows continued “repayments longterm debt financing obligations” includes 761 repayment atlas debt 271 payoff atlas revolving credit facility “net purchases sales treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 4262 775 6 2011 2010 2009 respectively 2011 2010 company purchased 423 million 88 million common shares 4250 750 ongoing share repurchase program respectively 2011 2010 “net sales purchases shortterm investments” consist restricted cash associated capitalinvestment projects company’s pascagoula el segundo refineries acquisitions pending tax deferred exchanges upstream abandonment activities invested shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet company issued 374 1250 350 2011 2010 2009 respectively tax exempt bonds source funds us refinery projects included “proceeds issuance longterm debt” consolidated statement cash flows excludes changes consolidated balance sheet affect cash 2009 payments related “accrued liabilities” excluded “net decrease increase operating working capital” reported “capital expenditures” “accrued liabilities” related upstream operating agreements outside united states recorded 2008 refer also note 25 page fs58 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2011 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table note 5 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method fs32 note 5 summarized financial data chevron usa inc continued summarized financial information cusa consolidated subsidiaries follows note 6 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries follows restrictions ctc’s ability pay dividends make loans advances december 31 2011 note 7 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 12 page fs39 discussion tco operations summarized financial information 100 percent tco presented following table note lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2011 2010 2009 follows prior years adjusted exclude cost certain charters rental expenses fs33 notes consolidated financial statements millions dollars except pershare amounts note 8 lease commitments continued contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2011 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 9 fair value measurements accounting standards fair value measurement asc 820 establish framework measuring fair value stipulate disclosures fair value measurements standards apply recurring nonrecurring fair value measurements financial nonfinancial assets liabilities among required disclosures fair value hierarchy inputs company uses value asset liability three levels fair value hierarchy described follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract level 3 unobservable inputs company use level 3 inputs recurring fair value measurements level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities table shows fair value hierarchy assets liabilities measured fair value recurring basis december 31 2011 december 31 2010 marketable securities company calculates fair value marketable securities based quoted market prices identical assets liabilities fair values reflect cash would received instruments sold december 31 2011 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives identical similar provisions contracts publicly traded regular basis company uses market values publicly traded instruments input fair value calculations company’s derivative instruments principally include futures swaps options forward contracts crude oil natural gas refined products derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange assets liabilities measured fair value recurring basis fs34 note 9 fair value measurements continued derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information company incorporates internal review evaluation assessment procedures including comparison level 2 fair values derived company’s internally developed forward curves sample basis pricing information document reasonable logical supportable fair value determinations proper level classification impairments “properties plant equipment” company material longlived assets measured fair value nonrecurring basis report 2011 2010 impairments “investments advances” company material investments advances measured fair value nonrecurring basis report 2011 2010 assets liabilities required measured fair value company holds cash equivalents bank time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 15864 14060 december 31 2011 december 31 2010 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values 3958 2855 december 31 2011 december 31 2010 respectively fair values cash equivalents bank time deposits reflect cash would received instruments settled december 31 2011 “cash equivalents” include investments carryingfair value 1240 855 december 31 2011 december 31 2010 respectively december 31 2011 investments include restricted funds related various capitalinvestment projects acquisitions pending tax deferred exchanges upstream abandonment activities reported “deferred charges assets” consolidated balance sheet longterm debt 4101 5636 december 31 2011 december 31 2010 estimated fair values 4928 6311 respectively carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2011 2010 material fair value hierarchy assets liabilities measured fair value nonrecurring basis december 31 2011 follows assets liabilities measured fair value nonrecurring basis fs35 notes consolidated financial statements millions dollars except pershare amounts note 10 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses international swaps derivatives association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk derivative instruments measured fair value december 31 2011 december 31 2010 december 31 2009 classification consolidated balance sheet consolidated statement income follows consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments foreign currency company may enter currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open currency derivative contracts december 31 2011 2010 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2011 2010 company interest rate swaps fs36 note 10 financial derivative instruments continued concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers note 11 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” defined accounting standards segment reporting asc 280 upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined asc 280 codm company’s executive committee excom committee senior officers includes chief executive officer excom reports board directors chevron corporation operating segments represent components company described accounting standards segment reporting asc 280 engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members excom also individual management responsibilities participate committees purposes acting codm company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level fs37 notes consolidated financial statements millions dollars except pershare amounts note 11 operating segments geographic data continued “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2011 2010 follows “all other” assets consist primarily worldwide cash equivalents time deposits marketable securities real estate energy services information systems mining operations power generation businesses alternative fuels technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2011 2010 2009 presented table follows products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale additives fuels lubricant oils transportation trading refined products crude oil natural gas liquids “all other” activities include revenues mining operations power generation businesses insurance operations real estate activities energy services alternative fuels technology companies united states single country accounted 10 percent company’s total sales operating revenues 2011 2010 2009 fs38 note 11 operating segments geographic data continued segment income taxes segment income tax expense years 2011 2010 2009 follows segment information additional information segmentation major equity affiliates contained note 12 beginning page fs39 information related properties plant equipment segment contained note 13 page fs41 note 12 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period december 31 2011 company’s carrying value investment tco 180 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 7 page fs33 summarized financial information 100 percent tco fs39 notes consolidated financial statements millions dollars except pershare amounts note 12 investments advances continued petropiar chevron 30 percent interest petropiar joint stock company formed 2008 operate hamaca heavyoil production upgrading project located venezuela’s orinoco belt 25year contract term prior formation petropiar chevron 30 percent interest hamaca project december 31 2011 company’s carrying value investment petropiar approximately 180 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company joined consortium 1997 investments advances totaling 1094 includes longterm loans l111 yearend 2011 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2011 company’s carrying value investment petroboscan approximately 220 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng ltd chevron 36 percent interest angola lng ltd process liquefy natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs holdings joint venture imports refines markets petroleum products petrochemicals predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned conocophillips corporation star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company ltd sprc owns star refinery thailand ptt public company limited owns remaining 36 percent sprc caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2011 fair value chevron’s share cal common stock approximately 1600 information “sales operating revenues” consolidated statement income includes 20164 13672 10391 affiliated companies 2011 2010 2009 respectively “purchased crude oil products” includes 7489 5559 4631 affiliated companies 2011 2010 2009 respectively “accounts notes receivable” consolidated balance sheet includes 1968 1718 due affiliated companies december 31 2011 2010 respectively “accounts payable” includes 519 377 due affiliated companies december 31 2011 2010 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 957 1543 2422 december 31 2011 2010 2009 respectively fs40 note 13 properties plant equipment1 note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party eight pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable could material net income one period company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted fs41 notes consolidated financial statements millions dollars except pershare amounts note 14 litigation continued remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “10 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within fifteen days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first interim award international arbitration tribunal discussed chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador chevron continue vigorous defense imposition liability chevron assets ecuador lago agrio plaintiffs’ lawyers stated press releases media seek enforce ecuadorian judgement various countries otherwise disrupt chevron’s operations chevron expects contest defend actions fs42 chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 tribunal issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal january 25 2012 tribunal converted order interim measures interim award chevron filed renewed application interim measures january 4 2012 republic ecuador opposed chevron’s application requested existing order interim measures vacated january 9 2012 february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron particular preclude certification republic ecuador would cause judgment enforceable chevron expects continue seeking permanent injunctive relief monetary relief tribunal series recent us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes award damages declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable march 7 2011 federal district court issued preliminary injunction prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case pending resolution chevron’s civil lawsuit federal district court may 31 2011 federal district court severed claims one eight chevron’s complaint ninth claim declaratory relief imposed discovery stay claims one eight pending trial ninth claim declaratory relief september 19 2011 us court appeals second circuit vacated preliminary injunction stayed trial chevron’s ninth claim declaratory relief set november 14 2011 denied defendants’ mandamus petition recuse judge hearing lawsuit second circuit issued opinion january 26 2012 ordering dismissal chevron’s ninth claim declaratory relief february 16 2012 federal district court lifted stay claims one eight ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 15 taxes income taxes 2011 beforetax income us operations including related corporate charges 10222 compared fs43 notes consolidated financial statements millions dollars except pershare amounts note 15 taxes continued beforetax income 6528 1310 2010 2009 respectively international operations beforetax income 37412 25527 17218 2011 2010 2009 respectively us federal income tax expense reduced 191 162 204 2011 2010 2009 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table company’s effective tax rate increased 403 percent 2010 433 percent 2011 increase primarily reflected higher effective tax rates international upstream jurisdictions higher international upstream effective tax rates driven primarily lower utilization nonus tax credits 2011 effect changes income tax rates periods partially offset foreign currency remeasurement impacts periods company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2011 increased approximately 3600 yearend 2010 increase related increased temporary differences property plant equipment deferred tax assets increased approximately 2500 2011 increases primarily related additional foreign tax credits arising earnings hightaxrate international jurisdictions substantially offset valuation allowances increased temporary differences employee benefits effects partially offset reductions deferred credits resulting primarily usage tax benefits international tax jurisdictions overall valuation allowance relates deferred tax assets foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2011 tax loss carryforwards approximately 2160 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2012 2036 foreign tax credit carryforwards 8476 expire 2012 2021 december 31 2011 2010 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 24376 december 31 2011 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable possible remittance earnings intended reinvested indefinitely end 2011 deferred income taxes recorded undistributed earnings certain international operations indefinite reinvestment earnings planned company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested fs44 note 15 taxes continued uncertain income tax positions accounting standards uncertainty income taxes asc 74010 company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2011 2010 2009 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included approximately 80 percent 3481 unrecognized tax benefits december 31 2011 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2011 jurisdictions latest years income tax examinations finalized follows united states 2007 nigeria 2000 angola 2001 saudi arabia 2003 kazakhstan 2005 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2011 accruals 118 anticipated interest penalty obligations included consolidated balance sheet compared accruals 225 yearend 2010 income tax expense benefit associated interest penalties 64 40 20 2011 2010 2009 respectively taxes income fs45 notes consolidated financial statements millions dollars except pershare amounts note 16 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date 2011 374 taxexempt bonds related projects pascagoula mississippi refinery issued company may periodically enter interest rate swaps portion shortterm debt december 31 2011 company interest rate swaps shortterm debt december 31 2011 company 6000 committed credit facilities various major banks expiring december 2016 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2011 december 31 2011 2010 company classified 5600 5400 respectively shortterm debt longterm settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis note 17 longterm debt total longterm debt excluding capital leases december 31 2011 9684 company’s longterm debt outstanding yearend 2011 2010 follows march 2010 company filed sec automatic registration statement expires february 28 2013 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt 4101 matures follows 2012 17 2013 20 2014 2021 2015 0 2016 0 2016 2043 september 2011 1500 chevron corp bonds redeemed early june 2010 30 texaco capital inc bonds matured see note 9 beginning page fs34 information concerning fair value company’s longterm debt fs46 note 18 new accounting standards fair value measurement topic 820 amendments achieve common fair value measurement disclosure requirements us gaap ifrs asu 201104 may 2011 fasb issued asu 201104 becomes effective company january 1 2012 amendments asu 201104 result common fair value measurement disclosure requirements us gaap ifrs result amendments requirements us gaap measuring fair value disclosing information fair value measurements changed company anticipate changes existing classification measurement fair value amended standard becomes effective however company’s disclosures certain items required measured fair value expected expanded amended standard becomes effective comprehensive income topic 220 presentation comprehensive income asu 201105 fasb issued asu 201105 june 2011 standard becomes effective company january 1 2012 asu 201105 changes presentation requirements comprehensive income adoption standard expected significant impact company’s current financial statement presentation intangiblesgoodwill topic 350 testing goodwill impairment asu 201108 september 2011 fasb issued asu 201108 becomes effective company january 1 2012 standard simplifies companies test goodwill impairment company anticipate impact results operations financial position liquidity guidance becomes effective note 19 accounting suspended exploratory wells accounting standards costs exploratory wells asc 932 provide exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b entity making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense note entity required complete exploratory well producing well accounting standards provide number indicators assist entity demonstrating sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2011 following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 1877 exploratory well costs capitalized one year december 31 2011 939 26 projects related projects drilling activities way firmly planned near future 938 balance related 21 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 938 referenced following activities associated assessing reserves projects’ economic viability 322 six projects development alternatives review b 283 five projects development concept review government c 208 seven projects undergoing frontend engineering design final investment decision expected within three years 111 one project sanction approved fs47 notes consolidated financial statements millions dollars except pershare amounts note 19 accounting suspended exploratory wells continued construction progress initial recognition proved reserves expected upon reaching “economic producibility” per sec guidelines e 14 miscellaneous activities two projects smaller amounts suspended progress made 47 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 1877 suspended well costs capitalized period greater one year december 31 2011 represents 161 exploratory wells 47 projects tables contain aging costs well project basis note 20 stock options sharebased compensation expense stock options 2011 2010 2009 265 172 tax 229 149 tax 182 119 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 214 139 tax 194 126 tax 170 110 tax 2011 2010 2009 respectively significant stockbased compensation cost capitalized december 31 2011 2010 cash received payment option exercises sharebased payment arrangements 2011 2010 2009 948 385 147 respectively actual tax benefits realized tax deductions option exercises 121 66 25 2011 2010 2009 respectively cash paid settle performance units stock appreciation rights 151 140 89 2011 2010 2009 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2011 contractual terms vary three years performance units 10 years stock options stock appreciation rights texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options 10year contractual lives extending 2011 retained provision restored provision enabled participant exercised stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted beginning 2007 restored options issued ltip awards may granted former texaco plans unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans unexercised awards began expiring early 2010 continue expire early 2015 fs48 note 20 stock options sharebased compensation continued fair market values stock options stock appreciation rights granted 2011 2010 2009 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2011 presented total intrinsic value ie difference exercise price market price options exercised 2011 2010 2009 668 259 91 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2011 265 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period 17 years january 1 2011 number ltip performance units outstanding equivalent 2727874 shares 2011 1011200 units granted 810071 units vested cash proceeds distributed recipients 47167 units forfeited december 31 2011 units outstanding 2881836 fair value liability recorded instruments 294 addition outstanding stock appreciation rights awards granted various ltip former texaco unocal programs totaled approximately 22 million equivalent shares december 31 2011 liability 62 recorded awards note 21 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company accounting standards postretirement benefits asc 715 company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet fs49 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued funded status company’s pension postretirement benefit plans 2011 2010 follows amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2011 2010 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 9279 6749 end 2011 2010 respectively amounts consisted accumulated benefit obligations us international pension plans 11198 4518 respectively december 31 2011 9535 4161 respectively december 31 2010 fs50 note 21 employee benefit plans continued information us international pension plans accumulated benefit obligation excess plan assets december 31 2011 2010 components net periodic benefit cost amounts recognized comprehensive income 2011 2010 2009 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2011 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 eight years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2012 company estimates actuarial losses 476 142 75 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 260 recognized “accumulated comprehensive loss” 2012 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2011 approximately six seven years us international pension plans respectively two years postretirement benefit plans 2012 company estimates prior service credits costs 8 21 72 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs51 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 70 percent company’s pension plan assets december 31 2011 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2011 company selected 38 percent discount rate us pension plans 40 percent us postretirement benefit plan rate based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2011 discount rates end 2010 2009 48 53 percent 50 58 percent us pension plans us opeb plan respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2011 main us postretirement medical plan assumed health care costtrend rates start 8 percent 2012 gradually decline 5 percent 2023 beyond measurement december 31 2010 assumed health care costtrend rates started 8 percent 2011 gradually declined 5 percent 2018 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy fair value hierarchy inputs company uses value pension assets divided three levels level 1 fair values assets measured using unadjusted quoted prices assets prices identical assets active markets plans ability access level 2 fair values assets measured based quoted prices similar assets active markets quoted prices identical similar assets inactive markets inputs quoted prices observable asset inputs derived principally corroborated observable market data correlation means asset contractual term level 2 input observable substantially full term asset fair values level 2 assets generally obtained thirdparty broker quotes independent pricing services exchanges fs52 note employee benefit plans continued level 3 inputs fair value measurement unobservable assets valuation may performed using financial model estimated inputs entered model fair value measurements company’s pension plans 2011 2010 us equities include investments company’s common stock amount 35 december 31 2011 38 december 31 2010 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 fs53 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued effects fair value measurements using significant unobservable inputs changes level 3 plan assets period outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 86 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors established following approved asset allocation ranges equities 4070 percent fixed income cash 2065 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines reviewed regularly equities 6080 percent fixed income cash 2040 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset class risk mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2011 company contributed 1147 319 us international pension plans respectively 2012 company expects contributions approximately 600 300 us international pension plans respectively actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 223 2012 compared 198 paid 2011 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop described section follows total company matching contributions employee accounts within esip 263 253 257 2011 2010 2009 respectively cost reduced value shares released fs54 note employee benefit plans continued lesop totaling 38 97 184 2011 2010 2009 respectively remaining amounts totaling 225 156 73 2011 2010 2009 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted accounting standards sharebased compensation asc 718 debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total credits expense lesop 1 3 2011 2010 2009 respectively net credit respective years composed credits compensation expense 5 6 15 charges interest expense lesop debt 4 5 12 dividends paid lesop shares 18 46 110 used 2011 2010 2009 respectively service lesop debt contributions required 2011 2010 2009 dividends received lesop sufficient satisfy lesop debt service shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2011 2010 follows benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2011 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2011 2010 trust assets 51 57 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate unit individual performance prior year charges expense cash bonuses 1217 766 561 2011 2010 2009 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 20 beginning page fs48 note 22 equity retained earnings december 31 2011 2010 included approximately 10127 9159 respectively company’s share undistributed earnings equity affiliates december 31 2011 67 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron ltip addition approximately 258000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 23 restructuring reorganization first quarter 2010 company announced employee reduction programs related restructuring reorganization downstream businesses corporate staffs total terminations programs expected approximately 2700 employees 1300 affected employees located united states 2500 employees terminated december 31 2011 programs substantially completed end 2011 substantially remaining employees designated termination programs expected leave 2012 beforetax charge 244 recorded first quarter 2010 associated programs 138 remained outstanding december 31 2010 2011 fs55 notes consolidated financial statements millions dollars except pershare amounts note 23 restructuring reorganization continued company made payments 74 associated liabilities majority payments downstream balance december 31 2011 classified current liability consolidated balance sheet note 24 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs43 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity guarantees company’s guarantee approximately 600 associated certain payments terminal use agreement entered company affiliate terminal commenced operations third quarter 2011 approximate 16year term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments end 2011 company paid 48 indemnities continues obligated 250 possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims asserted february 2009 equilon indemnities must asserted later february 2012 motiva indemnities february 2012 motiva enterprises llc delivered letter company purporting preserve unmatured claims certain motiva indemnities letter provides estimate ultimate claim amount management believe letter information provides basis estimate amount range loss potential range loss respect either equilon motiva indemnities terms indemnities maximum limit amount potential future payments company posts assets collateral made payments indemnities amounts payable indemnities described preceding paragraph net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments fs56 note contingencies commitments continued various commitments 2012 6000 2013 4000 2014 3900 2015 3200 2016 1900 2017 7400 portion commitments may ultimately shared project partners total payments agreements approximately 6600 2011 6500 2010 8100 2009 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2011 1404 included balance remediation activities approximately 180 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2011 185 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2011 environmental reserves balance 1219 675 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 544 associated various sites international downstream 95 upstream 368 businesses 81 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2011 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 25 page fs58 discussion company’s asset retirement obligations contingencies april 26 2010 california appeals court issued ruling related adequacy environmental impact report eir supporting issuance certain permits city richmond california replace upgrade certain facilities chevron’s refinery richmond settlement discussions plaintiffs case ended late fourth quarter 2010 march 3 2011 trial court entered final judgment peremptory writ ordering city set aside project eir conditional use permits enjoining chevron work may 23 2011 company filed application city planning department conditional use permit revised project complete construction hydrogen plant certain sulfur removal facilities related infrastructure june 10 2011 city published notice preparation revised eir project revised fs57 note contingencies commitments continued recirculated eir intended comply appeals court decision management believes outcomes associated project uncertain due uncertainty company’s future course action potential outcomes action combination actions management believe estimate financial effects made time however company’s ultimate exposure may significant net income one future period chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 25 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2011 2010 2009 longterm portion 12767 balance end 2011 11999 note 26 financial information earnings 2011 included gains approximately 1300 relating sale nonstrategic properties amount approximately 800 500 related downstream upstream assets respectively earnings 2010 included gains approximately 700 relating sale nonstrategic properties amount approximately 400 300 related downstream upstream assets respectively revenues earnings contributions assets material periods presented financial information follows excess replacement cost carrying value inventories lastin firstout lifo method used 9025 6975 december 31 2011 2010 respectively replacement cost generally based average acquisition costs year lifo profits charges 193 21 168 included earnings years 2011 2010 2009 respectively company 4642 goodwill consolidated balance sheet related 2005 acquisition unocal 2011 acquisition atlas energy inc accounting standard goodwill asc 350 company tested goodwill impairment 2011 concluded impairment necessary fs58 note 27 earnings per share basic earnings per share eps based upon “net income attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 20 “stock options sharebased compensation” beginning page fs48 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings fs59 page intentionally left blank fs60 fiveyear financial summary unaudited fs61 supplemental information oil gas producing activities unaudited accordance fasb sec disclosure reporting requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information table costs incurred exploration property acquisitions development1 fs62 table ii capitalized costs related oil gas producing activities company’s estimated net provedreserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally angola chad democratic republic congo nigeria republic congo asia geographic area includes activities principally azerbaijan bangladesh china indonesia kazakhstan myanmar partitioned zone kuwait saudi arabia philippines thailand europe geographic area includes activity denmark netherlands norway united kingdom americas geographic region includes activities argentina brazil canada colombia trinidad tobago amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies amounts composed company’s equity interests venezuela angola refer note 12 beginning page fs39 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs63 table ii capitalized costs related oil gas producing activities continued fs64 table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2011 2010 2009 shown following table net income exploration production activities reported page fs38 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs38 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 25 “asset retirement obligations” page fs58 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements income tax expense 2010 conformed 2011 presentation certain tax items fs65 table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 25 “asset retirement obligations” page fs58 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements fs66 table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly vice chairman responsible company’s worldwide exploration production activities corporate reserves manager acts chairman rac 30 years’ experience working oil gas industry master science petroleum engineering degree stanford university experience includes 15 years managing oil gas reserves processes chairman society petroleum engineers oil gas reserves committee currently serves united nations expert group resources classification active member society petroleum evaluation engineers also past member joint committee reserves evaluator training california conservation committee rac members degreed professionals 15 years’ experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates reserves activities managed two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves fs67 table v reserve quantity information continued summary net oil gas reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance corporate reserves manual technologies used establishing proved reserves additions 2011 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserve quantities end 2011 proved undeveloped reserves consolidated companies totaled 37 billion barrels oilequivalent boe approximately 68 percent reserves attributed natural gas 60 percent located australia crude oil condensate natural gas liquids fs68 table v reserve quantity information continued ngls accounted 29 percent total largest concentration reserves africa asia united states synthetic oil accounted balance proved undeveloped reserves located canada americas region proved undeveloped reserves equity affiliates amounted 13 billion boe yearend crude oil condensate ngls represented 61 percent reserves tco accounting majority amount natural gas represented 25 percent total approximately 43 percent reserves tco remaining proved undeveloped reserves attributed synthetic oil venezuela 2011 total 220 million boe transferred proved undeveloped proved developed consolidated companies united states approximately 90 million boe transferred primarily due ongoing drilling activities california locations asia 55 million boe transferred proved developed primarily driven startup gas project thailand start several small projects africa europe americas accounted remainder affiliated companies transfers 25 million boe proved undeveloped proved developed investment convert proved undeveloped proved developed reserves 2011 investments totaling approximately 67 billion made consolidated companies equity affiliates advance development proved undeveloped reserves australia 21 billion expended primarily driven construction activities gorgon lng project africa 14 billion expended various projects including offshore development projects nigeria angola nigeria construction progressed deepwater project development activities continued natural gas processing plant angola offshore development drilling progressed along several gas injection projects asia expenditures year totaled 10 billion included construction gas processing facility thailand gas development project china development activities indonesia united states expenditures totaled 09 billion offshore development projects gulf mexico americas development expenditures totaled 09 billion variety projects including offshore development project brazil europe 01 billion expended various development projects company’s share affiliated companies’ expenditures 03 billion primarily lng project angola development activities kazakhstan proved undeveloped reserves five years reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2011 company held approximately 18 billion boe proved undeveloped reserves remained undeveloped five years reserves held consolidated affiliated companies majority reserves locations company proven track record developing major projects africa approximately 330 million boe related deepwater natural gas developments nigeria angola major nigerian deepwater development projects include agbami started production 2008 ongoing development activities maintain full utilization infrastructure capacity usan development expected start production 2012 also nigeria various fields infrastructure associated escravos gas projects currently development asia approximately 240 million boe remain classified proved undeveloped majority volumes relate ongoing development activities pattani field thailand malampaya field philippines scheduled maintain production within contractual infrastructure constraints balance relates infrastructure constraints azerbaijan australia approximately 110 million boe remain classified undeveloped due compression project north west shelf venture scheduled startup 2013 united states approximately 70 million boe remain proved undeveloped primarily related steamflood expansion deepwater development projects americas europe approximately 50 million boe related contractual constraints infrastructure limitations future compression projects affiliated companies approximately 10 billion boe proved undeveloped reserves held five years tco affiliate kazakhstan accounts approximately 880 million boe field production constrained plant capacity limitations field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion venezuela affiliate operates hamaca field’s synthetic heavy oil upgrading operation accounts 120 million boe proved undeveloped reserves development drilling continues hamaca optimize utilization upgrader capacity annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2011 assessment result material changes reserves classified proved undeveloped past three years fs69 table v reserve quantity information continued ratio proved undeveloped reserves total proved reserves ranged 37 percent 44 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities december 31 2011 proved reserves company’s consolidated operations 85 billion boe refer term “reserves” page e11 definition oilequivalent reserves approximately 23 percent total reserves located united states company’s interests equity affiliates proved reserves 27 billion boe 78 percent associated company’s 50 percent ownership tco aside tengiz field tco affiliate single property accounted 5 percent company’s total oilequivalent proved reserves 22 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted 47 percent company’s total oilequivalent proved reserves properties geographically dispersed located united states canada south america africa asia australia united states total proved reserves yearend 2011 19 billion boe california properties accounted 35 percent us reserves classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods company’s heavyoil fields california employ continuous steamflooding process gulf mexico region contains 24 percent us reserves liquids representing 77 percent reserves gulf production operations mostly offshore result also capital intensive us areas represent remaining 41 percent us reserves liquids accounting 42 percent total production crude oil fields utilize enhanced recovery methods including waterflood co2 injection three years ending december 31 2011 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved reserves crude oil condensate natural gas liquids synthetic oil changes thereto years 2009 2010 2011 shown table following page company’s estimated net proved reserves natural gas shown page fs73 fs70 table v reserve quantity information continued net proved reserves crude oil condensate natural gas liquids synthetic oil noteworthy amounts categories liquids proved reserve changes 2009 2011 discussed revisions 2009 net revisions increased reserves 355 million barrels worldwide consolidated companies decreased reserves 187 million barrels equity affiliates consolidated companies largest increase 460 million barrels americas due inclusion synthetic oil related canadian oil sands united states reserves increased 63 million barrels result development drilling performance revisions increases partially offset decreases 121 million barrels asia 46 million barrels africa asia decreases indonesia azerbaijan driven effect higher 12month average prices calculation reserves associated productionsharing contracts effect reservoir performance revisions africa reserves nigeria declined result higher prices productionsharing contracts well reservoir performance affiliated companies tco declined 184 million barrels primarily due effect higher 12month average prices royalty determination affiliated companies 266 million barrels heavy crude oil reclassified synthetic oil activities venezuela 2010 net revisions increased reserves 103 million barrels consolidated companies decreased reserves 21 million barrels affiliated companies consolidated companies improved reservoir performance accounted majority 63 million barrel increase united states increases regions partially offset asia decreased result effect higher prices productionsharing contracts kazakhstan affiliated companies price effect royalty determination tco decreased reserves 33 million barrels partially offset improved reservoir performance development drilling venezuela fs71 table v reserve quantity information continued 2011 net revisions increased reserves 197 million barrels consolidated companies increased reserves 38 million barrels affiliated companies consolidated companies improved reservoir performance accounted majority 63 million barrel increase united states africa improved field performance drove 60 million barrel increase asia increases improved reservoir performance partially offset effects higher prices productionsharing contracts synthetic oil reserves canada increased 32 million barrels primarily due geotechnical revisions affiliated companies improved facility reservoir performance partially offset price effect royalty determination tco continued development drilling increased reserves venezuela improved recovery 2009 improved recovery increased liquids volumes 86 million barrels worldwide consolidated companies accounted 50 million barrels largest addition related improved secondary recovery nigeria affiliated companies increased reserves 36 million barrels due improvements related tco sour gas injectionsecond generation plant sgisgp facilities 2010 improved recovery increased volumes 77 million barrels worldwide consolidated companies reserves africa increased 58 million barrels due primarily secondary recovery performance nigeria reserves united states increased 11 million primarily california affiliated companies increased reserves 3 million barrels 2011 improved recovery increased volumes 58 million barrels worldwide consolidated companies reserves africa increased 48 million barrels due primarily secondary recovery performance nigeria reserves united states increased 6 million primarily california americas increased 4 million barrels extensions discoveries 2009 extensions discoveries increased liquids volumes 52 million barrels worldwide largest additions 20 million barrels australia related gorgon project 13 million barrels americas related delineation drilling argentina africa united states accounted 10 million barrels 6 million barrels respectively 2010 extensions discoveries increased consolidated companies reserves 63 million barrels worldwide united states americas increased reserves 19 million barrels asia increased reserves 16 million barrels single area united states individually significant drilling activity argentina brazil accounted majority increase americas asia increase primarily related activity azerbaijan 2011 extensions discoveries increased consolidated companies reserves 299 million barrels worldwide united states additions related two gulf mexico projects resulted majority 140 million barrel increase australia wheatstone project increased liquid volumes 65 million barrels africa americas increased reserves 34 million 30 million barrels respectively following start new projects areas europe new project united kingdom increased reserves 26 million barrels asia reserves increased 4 million barrels purchases 2011 purchases increased worldwide liquid volumes 42 million barrels acquisition additional acreage canada increased synthetic oil reserves 40 million barrels fs72 table v reserve quantity information continued net proved reserves natural gas noteworthy amounts categories natural gas provedreserve changes 2009 2011 discussed revisions 2009 net revisions increased reserves 569 bcf consolidated companies decreased reserves 44 bcf affiliated companies consolidated companies net increases 493 bcf asia primarily result reservoir studies bangladesh development drilling thailand results partially offset downward revision due impact higher prices productionsharing contracts myanmar australia 166 bcf increase reserves resulted improved reservoir performance compression americas reserves decreased 126 bcf driven primarily effect higher prices productionsharing contracts trinidad tobago united states net increase 39 bcf result development drilling gulf mexico partially offset performance revisions california midcontinent areas equity affiliates downward revision 237 bcf tco due effect higher prices royalty determination increase gas injection sgisgp facilities decline partially offset performance drilling opportunities related angola lng project 2010 net revisions increased reserves 197 bcf consolidated companies offset 268 bcf decrease net revisions affiliated companies consolidated companies net increase united states 220 bcf primarily midcontinent area gulf mexico result number small upward revisions related improved reservoir performance drilling activity none individually significant increase partially offset downward revisions due impact higher prices productionsharing contracts asia equity affiliates downward revision 324 bcf tco due price effect royalty determination change variableroyalty calculation decline partially offset recognition additional reserves related angola lng project fs73 table v reserve quantity information continued 2011 net revisions increased reserves 415 bcf consolidated companies increased reserves 82 bcf affiliated companies consolidated companies improved reservoir performance accounted majority 217 bcf increase united states asia net increase 196 bcf driven development drilling improved field performance thailand partially offset effects higher prices productionsharing contracts kazakhstan americas negative performance revision trinidad tobago partially offset increases colombia drilling activities reactivation existing field affiliated companies ongoing reservoir assessment resulted recognition additional reserves related angola lng project tco improved facility reservoir performance offset price effect royalty determination extensions discoveries 2009 worldwide extensions discoveries 4387 bcf attributed consolidated companies australia gorgon project accounted 4276 bcf additions asia development drilling thailand accounted majority increase united states delineation drilling california accounted majority increase 2011 extensions discoveries increased consolidated companies’ reserves 4680 bcf worldwide australia wheatstone project accounted 4035 bcf additions africa start new natural gas development project nigeria resulted 290 bcf increase united states development drilling accounted majority 287 bcf increase purchases 2011 purchases increased worldwide reserves 1233 bcf united states acquisitions marcellus shale increased reserves 1230 bcf sales 2009 worldwide sales 117 bcf related consolidated companies americas sale properties argentina accounted 84 bcf sale properties gulf mexico accounted majority 33 bcf decrease united states 2011 sales decreased consolidated companies’ reserves 174 bcf worldwide australia wheatstone project unitization equity sales agreements reduced reserves 77 bcf united states sales alaska smaller fields reduced reserves 95 bcf fs74 table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fasb estimated future cash inflows production computed applying 12month average prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations valuation prescribed fasb requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs75 table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs76 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 36 schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 14 consolidated financial statements beginning page fs43 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 22nd day february 2013 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 22nd day february 2013 principal executive officers directors sjohn watson john watson chairman board chief executive officer linnet f deily linnet f deily sgeorge l kirkland george l kirkland vice chairman board robert e denham robert e denham alice p gast alice p gast principal financial officer enrique hernandez jr enrique hernandez jr spatricia e yarrington patricia e yarrington vice president chief financial officer charles w moorman charles w moorman kevin w sharer kevin w sharer principal accounting officer smatthew j foehr matthew j foehr vice president comptroller john g stumpf john g stumpf ronald sugar ronald sugar slydia beebe lydia beebe attorneyinfact carl ware carl ware page intentionally left blank fs1 key financial results refer “results operations” section beginning page fs6 discussion financial results major operating area three years ended december 31 2012 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark indonesia kazakhstan myanmar netherlands nigeria norway partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend mostly profitability upstream downstream business segments biggest factor affecting results operations company level price crude oil downstream business crude oil largest cost component refined products seasonality primary driver changes company’s quarterly earnings year sustain longterm competitive position upstream business company must develop replenish inventory projects offer attractive financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states time certain governments sought renegotiate contracts impose additional costs company governments may attempt future civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning page fs6 discussions net gains asset sales 2012 asset dispositions restructurings may also occur future periods could result significant gains losses company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could fs2 also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control external factors include general level inflation also commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 112 per barrel fullyear 2012 compared 111 2011 midfebruary 2013 brent price 118 per barrel majority company’s equity crude production priced based brent benchmark wti price averaged 94 per barrel fullyear 2012 compared 95 2011 midfebruary 2013 wti price 97 per barrel wti traded discount brent throughout 2012 due high inventories us midcontinent market driven strong growth domestic production differential crude oil prices exists highquality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated supply heavy crude available versus demand function capacity refineries able process lower quality feedstock light products motor gasoline jet fuel aviation gasoline diesel fuel 2012 differential us light heavy crude oil remained historical norms light sweet crude oil production midcontinent region increased outbound capacity cushing remained constrained outside us differential narrowed modestly 2012 additional heavy crude oil conversion capacity came line chevron produces shares production heavy crude oil california chad indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs10 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets united states prices henry hub averaged 271 per thousand cubic feet mcf 2012 compared 400 2011 midfebruary 2013 henry hub spot price 330 per mcf fluctuations price natural gas united states closely associated customer demand relative volumes produced north america outside united states price changes natural gas depend wide range supply demand regulatory circumstances locations chevron investing longterm projects install infrastructure produce liquefy natural gas transport tanker markets international natural gas realizations averaged 600 per mcf 2012 compared 540 per mcf 2011 see page fs10 company’s average natural gas realizations us international regions fs3 company’s worldwide net oilequivalent production 2012 averaged 2610 million barrels per day onefifth company’s net oilequivalent production 2012 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait opec quotas effect company’s net crude oil production 2012 2011 december 2012 meeting members opec supported maintaining current production quota 30 million barrels per day effect since december 2008 company estimates oilequivalent production 2013 average approximately 2650 million barrels per day based average brent price 112 per barrel fullyear 2012 estimate subject many factors uncertainties including quotas may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays project startups rampups fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states refer “results operations” section pages fs6 fs7 additional discussion company’s upstream business refer table v beginning page fs67 tabulation company’s proved net oil gas reserves geographic area beginning 2010 yearend 2010 2012 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2012 november 7 2011 drilling development well deepwater frade field 75 miles offshore brazil unanticipated pressure spike caused oil migrate well bore series fissures sea floor emitting approximately 2400 barrels oil source seep substantially contained within four days well plugged abandoned evidence coastal wildlife impacts related seep emerged march 14 2012 company identified small second seep different part field precautionary measure company partners decided temporarily suspend field production received approval brazil’s national petroleum agency anp chevron partners cooperating brazilian authorities july 19 2012 anp issued final investigative report november 2011 incident brazilian federal district prosecutor filed two civil lawsuits seeking 107 billion damages two seeps company aware basis damages awarded civil lawsuit july 31 2012 court presiding civil litigation entered preliminary injunction barring chevron conducting oil production transportation activities brazil pending completion legal proceedings commenced federal district prosecutor ongoing proceedings anp brazilian environment natural resources regulatory agency september 28 2012 injunction modified clarify chevron may continue containment mitigation activities supervision anp appeal november 27 2012 injunction revoked entirety federal district prosecutor also filed criminal charges 11 chevron employees jurisdiction three matters moved campos court rio de janeiro february 19 2013 court dismissed criminal matter subject appeal prosecutor chevron submitted anp plan restarting limited fs4 production frade field company’s ultimate exposure related incident currently determinable could significant net income one period company entered nonbinding financing term sheet petroboscan joint stock company owned 392 percent chevron operates boscan field venezuela finalized financing expected occur stages limited drawdown period intended support specific work program maintain increase production agreedupon level terms designed support cash needs ongoing operations new development well distributions shareholders including current outstanding obligations loan repaid future petroboscan crude sales definitive documents negotiation downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast asia southern africa chevron operates significant ownership interests refineries areas company completed multiyear plan 2012 streamline downstream asset portfolio concentrate resources capital strategic assets third quarter 2012 company completed sale perth amboy new jersey refinery operated products terminal recent years 2012 company completed sale fuels marketing aviation businesses eight countries caribbean refer “results operations” section pages fs7 fs8 additional discussion company’s downstream operations consists mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology companies operating developments key operating developments events 2012 early 2013 included following upstream australia october 2012 company acquired additional interests clio acme fields carnarvon basin exchange chevrons interests browse development consolidating interests carnarvon basin fits strategically longterm plans grow wheatstone area resource base creates expansion opportunities wheatstone project september 2012 company completed sale equity interest wheatstone project tokyo electric 2012 early 2013 company announced natural gas discoveries 473 percentowned operated pontus prospect block wa37l 50 percentowned operated satyr prospect block wa374p 50 percentowned operated pinhoe prospect block wa383p 50 percentowned operated arnhem prospect block wa364p 50 percentowned operated kentish knock south prospect block wa365p discoveries expected contribute potential expansion opportunities companyoperated lng facilities 2012 chevron signed nonbinding heads agreement tohoku electric chubu electric additional binding agreements tokyo electric lng offtake wheatstone project date 80 percent chevrons equity lng wheatstone covered longterm agreements customers asia angola early 2013 company announced plans proceed development mafumeira sul project located block 0 angolarepublic congo joint development area third quarter 2012 company reached final investment decision crossborder development deepwater lianzi field bangladesh july 2012 company reached final investment decision bibiyana expansion project canada february 2013 chevron acquired 50 percentowned operated interest kitimat lng project proposed pacific trail pipeline 50 percent nonoperated interest approximately 644000 acres horn river liard basins china 2012 chevron entered agreement acquire two exploration blocks south china seas pearl river mouth basin government approval expected 2013 fs5 kurdistan region iraq third quarter 2012 chevron acquired 80 percent interest operatorship rovi sarta blocks lithuania october 2012 chevron acquired 50 percent interest company exploration interests shale gas block morocco january 2013 company announced signed agreements explore three offshore areas nigeria february 2012 production commenced deepwater usan project sierra leone september 2012 company awarded 55 percent interest operatorship two deepwater exploration blocks suriname november 2012 company acquired 50 percent interest two offshore exploration blocks ukraine second quarter 2012 company bid successfully right exclusively negotiate 50 percent interest operatorship shale gas block united kingdom july 2012 company initiated frontend engineering design feed deepwater rosebank project west shetland islands united states october 2012 company acquired additional acreage new mexico major portion acreage located delaware basin company already one largest leaseholders second quarter 2012 company successfully bid additional shelf deepwater exploration acreage central gulf mexico fourth quarter 2012 company submitted high bids additional deepwater acreage western gulf mexico first quarter 2012 production commenced caesartonga project deepwater gulf mexico downstream caribbean 2012 company completed sale fuels marketing aviation businesses eight countries caribbean europe first quarter 2012 company completed sale fuels marketing finished lubricants aviation businesses spain saudi arabia october 2012 companys 50 percentowned chevron phillips chemical company llc announced 35 percentowned saudi polymers company began commercial production new petrochemical facility aljubail south korea 2012 companys 50 percentowned gs caltex affiliate completed sale certain power assets united states third quarter 2012 company completed sale idled perth amboy new jersey refinery operating terminal april 2012 companys 50 percentowned chevron phillips chemical company llc announced execution feed contracts ethane cracker cedar bayou facility baytown texas two polyethylene facilities near sweeny facility old ocean texas common stock dividends quarterly common stock dividend increased 111 percent april 2012 090 per common share making 2012 25th consecutive year company increased annual dividend payment common stock repurchase program company purchased 50 billion common stock 2012 share repurchase program began 2010 set term monetary limits results operations major operating areas following section presents results operations company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 10 beginning page fs36 discussion company’s “reportable segments” defined accounting standards segment reporting accounting standards codification asc 280 section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream us upstream earnings 53 billion 2012 decreased 12 billion 2011 primarily due lower natural gas crude oil realizations 340 million 200 million respectively lower crude oil production 240 million lower gains asset sales 180 million us upstream earnings 65 billion 2011 increased 24 billion 2010 benefit higher crude oil realizations increased earnings 28 billion periods partly offsetting effect lower net oilequivalent production decreased earnings 400 million higher operating expenses 200 million company’s average realization us crude oil natural gas liquids 2012 9521 per barrel compared 9751 2011 7159 2010 average natural gas realization 264 per thousand cubic feet 2012 compared 404 426 2011 2010 respectively fs6 net oilequivalent production 2012 averaged 655000 barrels per day 3 percent 2011 7 percent 2010 2012 2011 decrease production associated normal field declines absence volumes associated cook inlet alaska assets sold 2011 partially offsetting decrease rampup projects gulf mexico marcellus shale improved operational performance gulf mexico net liquids component oilequivalent production 2012 averaged 455000 barrels per day 2 percent 2011 7 percent 2010 net natural gas production averaged 12 billion cubic feet per day 2012 approximately 6 percent 2011 8 percent 2010 refer “selected operating data” table page fs10 threeyear comparative production volumes united states international upstream international upstream earnings 185 billion 2012 compared 183 billion 2011 increase mainly due gain approximate 14 billion asset exchange australia higher natural gas realizations 610 million nearly 600 million gain sale equity interest wheatstone project mostly offsetting effects lower crude oil volumes 13 billion higher exploration expenses 430 million foreign currency effects decreased earnings 275 million 2012 compared increase 211 million year earlier international upstream earnings 183 billion 2011 increased 47 billion 2010 higher prices crude oil increased earnings 71 billion benefit partly offset higher tax items 17 billion higher operating expenses including fuel 10 billion foreign currency effects increased earnings 211 million 2011 compared decrease 293 million 2010 company’s average realization international crude oil natural gas liquids 2012 10188 per barrel compared 10153 2011 7268 2010 average natural gas realization 599 per thousand cubic feet 2012 compared 539 464 2011 2010 respectively international net oilequivalent production 196 million barrels per day 2012 decreased 2 percent 2011 decreased 5 percent 2010 new production thailand nigeria 2012 offset normal field declines shutin frade field brazil major planned turnaround tengizchevroil decline 2011 2010 primarily due price effects entitlement volumes net liquids component international oilequivalent production 13 million barrels per day 2012 decrease approximately 5 percent 2011 decrease approximately 9 percent 2010 international net natural gas production 39 billion cubic feet per day 2012 6 percent 2011 4 percent 2010 refer “selected operating data” table page fs10 threeyear comparative international production volumes us downstream us downstream operations earned 20 billion 2012 compared 15 billion 2011 increase mainly due higher margins refined product sales 520 million higher earnings 140 million 50 percentowned chevron phillips chemical company llc cpchem benefits partly offset higher operating expenses 130 million earnings 15 billion 2011 increased 167 million 2010 earnings benefited 300 million improved margins refined products 200 million higher earnings cpchem 50 million absence 2010 charges related employee reductions benefits partly offset absence 400 million gain sale company’s ownership interest colonial pipeline company recognized 2010 refined product sales 121 million barrels per day 2012 declined 4 percent mainly reflecting lower gasoline fuel oil sales volumes refined products 126 million barrels per day 2011 decrease 7 percent 2010 decline mainly gasoline gas oil kerosene sales us branded gasoline sales 516000 barrels per day 2012 essentially flat 2011 declined approximately 10 percent 2010 decline 2012 fs7 2011 2010 primarily due weaker demand previously completed exits selected eastern us retail markets refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 23 billion 2012 compared 21 billion 2011 earnings increased due favorable change effects derivative instruments 190 million higher margins refined product sales 100 million foreign currency effects decreased earnings 173 million 2012 compared decrease 65 million year earlier earnings 21 billion 2011 increased 946 million 2010 gains asset sales benefited earnings 700 million primarily sale pembroke refinery related marketing assets united kingdom ireland also contributing earnings improved margins 200 million absence 2010 charges 90 million related employee reductions benefits partly offset unfavorable change effects derivative instruments 180 million foreign currency effects decreased earnings 65 million 2011 compared decrease 135 million 2010 refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refinery input volumes includes mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology companies net charges 2012 increased 426 million 2011 mainly due higher environmental reserve additions corporate tax items corporate charges partially offset lower employee compensation benefits expenses net charges 2011 increased 351 million 2010 mainly due higher expenses employee compensation benefits higher net corporate tax expenses fs8 consolidated statement income comparative amounts certain income statement categories shown sales operating revenues decreased 2012 mainly due 2011 sale company’s refining marketing assets united kingdom ireland lower crude oil volumes higher 2011 prices crude oil refined products resulted increased sales operating revenues compared 2010 income equity affiliates decreased 2012 2011 mainly due lower upstreamrelated earnings tengizchevroil kazakhstan result lower crude oil production higher operating expenses angola lng limited petropiar venezuela downstreamrelated earnings higher comparative periods primarily due higher margins cpchem income equity affiliates increased 2011 2010 mainly due higher upstreamrelated earnings tengizchevroil result higher prices crude oil downstreamrelated earnings also higher comparative periods primarily due higher earnings cpchem result higher margins sales commodity chemicals refer note 11 beginning page fs38 discussion chevron’s investments affiliated companies income 44 billion 2012 included net gains asset sales approximately 42 billion income 2011 2010 included net gains asset sales 15 billion 11 billion respectively interest income approximately 166 million 2012 145 million 2011 120 million 2010 foreign currency effects decreased income 207 million 2012 increasing income 103 million 2011 decreasing income 251 million 2010 crude oil product purchases 1408 billion 2012 mainly due 2011 sale company’s refining marketing assets united kingdom ireland lower natural gas prices crude oil product purchases 2011 increased 335 billion prior year due higher prices crude oil natural gas refined products operating selling general administrative expenses increased 900 million 2012 2011 mainly due higher contract labor professional services 590 million higher employee compensation benefits 280 million operating selling general administrative expenses increased 24 billion 2011 2010 increase primarily related higher fuel expenses 15 billion higher employee compensation benefits 700 million part increased fuel purchases 2011 reflected new commercial arrangement replaced prior product exchange agreement upstream operations indonesia exploration expenses 2012 increased 2011 mainly due higher geological geophysical costs well writeoffs exploration expenses 2011 increased 2010 mainly due higher geological geophysical costs partly offset lower well writeoffs increase 2012 2011 mainly due higher depreciation rates certain oil gas producing fields partially offset lower production levels decrease 2011 2010 mainly reflected lower production levels 2011 sale pembroke refinery partially offset higher depreciation rates certain oil gas producing fields taxes income decreased 2012 2011 primarily due lower import duties united kingdom reflecting sale company’s refining marketing assets united kingdom ireland 2011 partially offsetting decrease excise taxes associated consolidation star petroleum refining company beginning june 2012 taxes income decreased 2011 2010 primarily due lower import duties united kingdom reflecting 2011 sale pembroke refinery downstream assets partly offset higher excise taxes company’s south africa downstream operations total interest debt expenses fully capitalized 2012 2011 fs9 effective income tax rates 43 percent 2012 43 percent 2011 40 percent 2010 rate unchanged 2012 2011 impact lower effective tax rates international upstream operations offset foreign currency remeasurement impacts periods international upstream lower effective tax rates current period driven primarily effects asset sales onetime tax benefits reduced withholding taxes partially offset lower utilization tax credits year rate higher 2011 2010 primarily due higher effective tax rates certain international upstream jurisdictions higher international upstream effective tax rates driven primarily lower utilization nonus tax credits 2011 effect changes income tax rates periods partially offset foreign currency remeasurement impacts selected operating data12 fs10 liquidity capital resources cash equivalents time deposits marketable securities total balances 219 billion 201 billion december 31 2012 2011 respectively cash provided operating activities 2012 388 billion compared 411 billion 2011 314 billion 2010 cash provided operating activities net contributions employee pension plans approximately 12 billion 15 billion 14 billion 2012 2011 2010 respectively cash provided investing activities included proceeds deposits related asset sales 27 billion 2012 35 billion 2011 20 billion 2010 restricted cash 15 billion 12 billion associated tax payments upstream abandonment activities funds held escrow asset acquisition capital investment projects december 31 2012 2011 respectively invested shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet dividends paid common stockholders 68 billion 2012 61 billion 2011 57 billion 2010 april 2012 company increased quarterly dividend 111 percent 90 cents per common share debt capital lease obligations total debt capital lease obligations 122 billion december 31 2012 102 billion yearend 2011 20 billion increase total debt capital lease obligations 2012 included net effect 4 billion bond issuance early redemption 2 billion bond due march 2014 company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 60 billion december 31 2012 compared 59 billion yearend 2011 amounts 59 billion 56 billion reclassified longterm end period respectively yearend 2012 settlement obligations expected require use working capital 2013 company intent ability evidenced committed credit facilities refinance longterm basis december 31 2012 company 60 billion committed credit facilities various major banks expiring december 2016 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2012 addition november 2012 company filed securities exchange commission new registration statement expires november 2015 registration statement unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation chevron corporation profit sharingsavings plan trust fund texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s pl moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements company also modify capital spending plans extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals provide flexibility continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits company expects repurchase 500 million 2 billion common shares per quarter prevailing prices permitted securities laws legal requirements subject market conditions factors 2012 company purchased 466 million common shares 50 billion inception program fs11 capital exploratory expenditures 1 excludes acquisition atlas energy inc 2011 2012 company purchased 977 million shares 100 billion capital exploratory expenditures total expenditures 2012 342 billion including 21 billion company’s share equityaffiliate expenditures 2011 2010 expenditures 291 billion 218 billion respectively including company’s share affiliates’ expenditures 17 billion 14 billion respectively 342 billion expenditures 2012 89 percent 304 billion related upstream activities approximately 89 percent 87 percent expended upstream operations 2011 2010 international upstream accounted 72 percent worldwide upstream investment 2012 68 percent 2011 82 percent 2010 amounts exclude acquisition atlas energy inc 2011 company estimates 2013 capital exploratory expenditures 367 billion including 33 billion spending affiliates approximately 90 percent total 33 billion budgeted exploration production activities approximately 255 billion 77 percent amount projects outside united states spending 2013 primarily focused major development projects angola australia brazil canada china kazakhstan nigeria republic congo russia united kingdom us gulf mexico also included funding enhancing recovery mitigating natural field declines currentlyproducing assets focused exploration appraisal activities worldwide downstream spending 2013 estimated 27 billion 14 billion projects united states major capital outlays include projects construction refineries united states expansion additives production capacity singapore chemicals projects united states investments technology companies power generation corporate businesses 2013 budgeted 1 billion noncontrolling interests company noncontrolling interests 1308 million 799 million december 31 2012 2011 respectively distributions noncontrolling interests totaled 41 million 71 million 2012 2011 respectively pension obligations information related pension plan contributions included page fs54 note 20 consolidated financial statements heading “cash contributions benefit payments” refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs16 fs12 financial ratios financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2012 book value inventory lower replacement costs based average acquisition costs year approximately 93 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2012 higher 2011 2010 due lower beforetax interest costs debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage increase 2012 2011 due higher debt partially offset higher chevron corporation stockholders equity balance decrease 2011 2010 due higher chevron corporation stockholders equity balance guarantees offbalancesheet arrangements contractual obligations contingencies direct guarantees company’s guarantee 562 million associated certain payments terminal use agreement entered equity affiliate approximate 15year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications information related indemnifications included page fs56 note 22 consolidated financial statements heading “indemnifications” longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2013 37 billion 2014 39 billion 2015 41 billion 2016 24 billion 2017 18 billion 2018 65 billion portion commitments may ultimately shared project partners total payments agreements approximately 36 billion 2012 66 billion 2011 65 billion 2010 following table summarizes company’s significant contractual obligations contractual obligations1 excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 20 beginning page fs49 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 59 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20142015 period include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices fs13 financial derivative instruments market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2012 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2012 company’s market exposure positions monitored managed daily basis internal risk control group accordance company’s risk management policies approved audit committee company’s board directors derivative commodity instruments used company’s risk management trading activities consist mainly futures options swap contracts traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition crude oil natural gas refined product swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet accordance accounting standards derivatives asc 815 resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2012 quarterly average decrease 31 million total assets quarterly average increase 12 million total liabilities company uses valueatrisk var model estimate potential loss fair value single day effect adverse changes market conditions derivative commodity instruments held issued var maximum projected loss exceeded within given probability confidence level given period time company’s var model uses monte carlo simulation method involves generating hypothetical scenarios specified probability distributions constructing full distribution portfolio’s potential values var model utilizes exponentially weighted moving average computing historical volatilities correlations 95 percent confidence level oneday holding period company’s 95 percent oneday var corresponds unrealized loss portfolio value would exceeded average one every 20 trading days portfolio held constant one day oneday holding period based assumption marketrisk positions liquidated hedged within one day hedging risk management company uses conventional exchangetraded instruments futures options well nonexchangetraded swaps liquidated hedged effectively within one day following table presents 95 percentoneday var company’s primary risk exposures area derivative commodity instruments december 31 2012 2011 foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2012 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2012 company interest rate swaps fs14 transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” note 11 consolidated financial statements page fs39 discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page fs40 note 13 consolidated financial statements heading “mtbe” ecuador information related ecuador matters included note 13 consolidated financial statements heading “ecuador” beginning page fs40 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 133 billion asset retirement obligations yearend 2012 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2012 environmental expenditures refer note 22 pages fs56 fs57 additional discussion environmental remediation provisions yearend reserves refer also note 23 page fs58 additional discussion companys asset retirement obligations suspended wells information related suspended wells included note 18 consolidated financial statements accounting suspended wells beginning page fs47 income taxes information related income tax contingencies included pages fs43 fs45 note 14 pages fs55 fs56 note 22 consolidated financial statements heading “income taxes” american taxpayer relief act 2012 act signed us law january 2 2013 several tax provisions expired end 2011 extended retroactive january 1 2012 including research development credit certain rules controlled foreign corporations impacts act included chevrons 2012 financial statements company expect impacts act material effect results operations consolidated financial position liquidity future reporting period contingencies information related contingencies included page fs57 note 22 consolidated financial statements heading “other contingencies” environmental matters virtually aspects businesses company engages subject various international federal state local environmental health safety laws regulations marketbased programs regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells regulations intended address concerns greenhouse gas emissions global climate change also continue evolve include international multinational mechanisms kyoto protocol european unions emissions trading system national us environmental protection agencys emission standards renewable transportation fuel content requirements domestic marketbased programs effect australia new zealand state regional californias global warming solutions act levels costs complying laws regulations pertaining company operations products embedded normal costs business possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect companys liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed fs15 expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2012 approximately 28 billion consolidated companies included expenditures approximately 11 billion environmental capital expenditures 17 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2013 total worldwide environmental capital expenditures estimated 12 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 20 beginning page fs49 includes information funded status company’s pension opeb plans end 2012 2011 components pension opeb expense three years ended december 31 2012 underlying assumptions periods pension opeb expense reported consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments yearend 2012 2011 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet differences related overfunded pension plans reported longterm asset “deferred charges assets” differences associated underfunded unfunded pension opeb plans reported “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense reported “accumulated comprehensive loss” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies 2012 company used expected longterm rate return 75 percent us pension plan assets account 70 percent company’s pension plan assets 2011 2010 company used longterm rate return 78 percent plan 10 years ending december 31 2012 actual asset returns averaged 71 percent plan actual return 2012 75 percent associated broad recovery financial markets year additionally exception two years within 10year period actual asset returns plan equaled exceeded 75 percent fs16 yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds december 31 2012 company used 36 percent discount rate us pension plans 39 percent main us opeb plan discount rates end 2011 2010 38 40 percent 48 50 percent us pension plans main us opeb plans respectively increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2012 13 billion indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2012 approximately 80 million 1 percent increase discount rate plan accounted 62 percent companywide pension obligation would reduced total pension plan expense 2012 approximately 165 million increase discount rate would decrease pension obligation thus changing funded status plan reported consolidated balance sheet aggregate funded status recognized consolidated balance sheet december 31 2012 net liability approximately 59 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 335 million would decreased plan’s underfunded status approximately 26 billion 22 billion plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2012 company’s pension plan contributions 12 billion including 844 million us plans 2013 company estimates contributions approximately 10 billion actual contribution amounts dependent upon investment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2012 172 million total liability reflected unfunded status plans end 2012 38 billion indication discount rate sensitivity determination opeb expense 2012 1 percent increase discount rate company’s primary us opeb plan accounted 82 percent companywide opeb expense would decreased opeb expense approximately 17 million 025 percent increase discount rate plan accounted 83 percent companywide opeb liabilities would decreased total opeb liabilities end 2012 approximately 80 million main us postretirement medical plan annual increase company contributions limited 4 percent per year active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 75 percent 2013 gradually drop 45 percent 2025 beyond indication health care costtrend rate sensitivity determination opeb expense 2012 1 percent increase rates main us opeb plan would increased opeb expense 15 million differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 20 beginning page fs49 information 97 billion beforetax actuarial losses recorded company december 31 2012 description method used amortize costs estimate costs recognized expense 2013 oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology economic conditions fs17 estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization proved reserves used amortizing capitalized costs related oil gas producing activities unitofproduction uop method capitalized exploratory drilling development costs depreciated uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2012 chevrons uop depreciation depletion amortization dda oil gas properties 107 billion proved developed reserves beginning 2012 48 billion barrels estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2012 would increased approximately 540 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review assessing whether property impaired fair value property must determined frequently discounted cash flow methodology best estimate fair value proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page fs67 changes proved reserve estimates three years ending december 31 2012 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs75 estimates proved reserve values three years ended december 31 2012 oil gas reserves commentary read conjunction properties plant equipment section note 1 consolidated financial statements beginning page fs28 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 8 beginning page fs33 section properties plant equipment note 1 summary significant accounting policies beginning page fs28 material individual impairments ppe investments recorded three years ending december 31 2012 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time fs18 making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2012 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 23 page fs58 additional discussions asset retirement obligations contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 14 beginning page fs43 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2012 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 17 page fs47 notes consolidated financial statements information regarding new accounting standards fs19 quarterly results stock market data unaudited fs20 fs21 report independent registered public accounting firm fs22 consolidated statement income millions dollars except pershare amounts fs23 consolidated statement comprehensive income millions dollars fs24 consolidated balance sheet millions dollars except pershare amounts fs25 consolidated statement cash flows millions dollars fs26 consolidated statement equity shares thousands amounts millions dollars fs27 note 1 summary significant accounting policies general upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations relate primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses additives fuels lubricant oils company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories generally stated average cost fs28 properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 18 beginning page fs47 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 8 beginning page fs33 relating fair value measurements fair value liability aro recorded asset liability legal obligation associ ated retirement longlived asset amount reasonably estimated refer also note 23 page fs58 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas fs29 mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 23 page fs58 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs23 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation employees accounts transactions accounting standards sharebased compensation asc 718 equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” activity equity attributable noncontrolling interests 2012 2011 2010 follows includes components comprehensive income disclosed separately consolidated statement comprehensive income fs30 note 3 information relating consolidated statement cash flows accordance accounting standards cashflow classifications stock options asc 718 “net decrease operating working capital” includes reductions 98 121 67 excess income tax benefits associated stock options exercised 2012 2011 2010 respectively amounts offset equal amount “net purchases treasury shares” includes changes postretirement benefits obligations longterm liabilities “acquisition atlas energy” reflects 3009 cash paid common shares atlas february 2011 “advance atlas energy” 403 made facilitate purchase 49 percent interest laurel mountain midstream llc day closing “net decrease increase operating working capital” includes 184 payments made connection atlas equity awards subsequent acquisition refer note 26 beginning page fs60 additional discussion atlas acquisition “repayments longterm debt financing obligations” 2011 includes 761 repayment atlas debt 271 payoff atlas revolving credit facility “net purchases treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 5004 4262 775 2012 2011 2010 respectively 2012 2011 company purchased 466 million 423 million common shares 5000 4250 ongoing share repurchase program respectively 2012 2011 “net purchases shortterm investments” consist restricted cash associated tax payments upstream abandonment activities funds held escrow asset acquisition capital investment projects invested shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet company issued 374 1250 2011 2010 respectively tax exempt bonds source funds us refinery projects included “proceeds issuance longterm debt” consolidated statement cash flows excludes changes consolidated balance sheet affect cash 2012 period excludes effects 800 proceeds received future periods sale equity interest wheatstone project capital expenditures 2012 period excludes 1850 increase properties plant equipment related upstream asset exchange australia refer also note 23 page fs58 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2012 fs31 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 4569 2012 945 2011 2753 2010 note 4 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method 2012 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa summarized financial information cusa consolidated subsidiaries presented table gives retroactive effect reorganizations occurred january 1 2010 however financial information following table may reflect financial position operating results periods presented reorganization occurred date summarized financial information cusa consolidated subsidiaries follows note 5 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries follows restrictions ctcs ability pay dividends make loans advances december 31 2012 fs32 note 6 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 11 page fs38 discussion tco operations summarized financial information 100 percent tco presented following table note 7 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2012 2011 2010 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2012 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 8 fair value measurements accounting standards fair value measurement asc 820 establish framework measuring fair value stipulate disclosures fair value measurements standards apply recurring nonrecurring fair value measurements financial nonfinancial assets liabilities among required disclosures fair value hierarchy inputs company uses value asset liability three levels fair value hierarchy described follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract fs33 level 3 unobservable inputs company use level 3 inputs recurring fair value measurements level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities table shows fair value hierarchy assets liabilities measured fair value recurring basis december 31 2012 december 31 2011 marketable securities company calculates fair value marketable securities based quoted market prices identical assets liabilities fair values reflect cash would received instruments sold december 31 2012 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives identical similar provisions contracts publicly traded regular basis company uses market values publicly traded instruments input fair value calculations company’s derivative instruments principally include futures swaps options forward contracts crude oil natural gas refined products derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information company incorporates internal review evaluation assessment procedures including comparison level 2 fair values derived company’s internally developed forward curves sample basis pricing information document reasonable logical supportable fair value determinations proper level classification properties plant equipment company material longlived assets measured fair value nonrecurring basis report 2012 2011 investments advances company material investments advances measured fair value nonrecurring basis report 2012 2011 assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis fs34 assets liabilities required measured fair value company holds cash equivalents bank time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 20939 15864 december 31 2012 december 31 2011 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values 708 3958 december 31 2012 december 31 2011 respectively fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2012 cash equivalents” include investments carryingfair value 1454 1240 december 31 2012 december 31 2011 respectively december 31 2012 investments classified level 1 include restricted funds related tax payments upstream abandonment activities funds held escrow asset acquisition capital investment projects reported “deferred charges assets” consolidated balance sheet longterm debt 6086 4101 december 31 2012 december 31 2011 estimated fair values 6770 4928 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 5853 classified level 1 fair value bonds 917 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2012 2011 material table previous page shows fair value hierarchy assets liabilities measured fair value nonrecurring basis december 31 2012 2011 note 9 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses international swaps derivatives association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk derivative instruments measured fair value december 31 2012 december 31 2011 december 31 2010 classification consolidated balance sheet consolidated statement income follows consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments fs35 concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers note 10 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” defined accounting standards segment reporting asc 280 upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology companies segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined asc 280 codm company’s executive committee excom committee senior officers includes chief executive officer excom reports board directors chevron corporation operating segments represent components company described accounting standards segment reporting asc 280 engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available fs36 segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members excom also individual management responsibilities participate committees purposes acting codm company’s primary country operation united states america country domicile components company’s operations reported international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2012 2011 follows “all other” assets consist primarily worldwide cash equivalents time deposits marketable securities real estate energy services information systems mining operations power generation businesses alternative fuels technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2012 2011 2010 presented table follows products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale additives fuels lubricant oils transportation trading refined products crude oil natural gas liquids “all other” activities include revenues mining operations power generation businesses insurance operations real estate activities energy services alternative fuels technology companies fs37 segment income taxes segment income tax expense years 2012 2011 2010 follows segment information additional information segmentation major equity affiliates contained note 11 information related properties plant equipment segment contained note 12 page fs40 note 11 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco formed 1993 develop tengiz korolev crude oil fields kazakh fs38 stan 40year period december 31 2012 company’s carrying value investment tco 170 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 6 page fs33 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company formed 2008 operate hamaca heavyoil production upgrading project located venezuela’s orinoco belt 25year contract term prior formation petropiar chevron 30 percent interest hamaca project december 31 2012 company’s carrying value investment petropiar approximately 180 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company joined consortium 1997 investments advances totaling 1187 includes longterm loans 1179 yearend 2012 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2012 company’s carrying value investment petroboscan approximately 200 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng ltd chevron 36 percent interest angola lng ltd process liquefy natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs holdings joint venture imports refines markets petroleum products petrochemicals predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 star petroleum refining company ltd chevron 64 percent ownership interest star petroleum refining company ltd sprc owns star refinery thailand ptt public company limited owns remaining 36 percent sprc due change control effective june 2012 sprc consolidated chevrons consolidated financial statements caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2012 fair value chevron’s share cal common stock 2690 information “sales operating revenues” consolidated statement income includes 17356 20164 13672 affiliated companies 2012 2011 2010 respectively “purchased crude oil products” includes 6634 7489 5559 affiliated companies 2012 2011 2010 respectively “accounts notes receivable” consolidated balance sheet includes 1207 1968 due affiliated companies december 31 2012 2011 respectively “accounts payable” includes 407 519 due affiliated companies december 31 2012 2011 respectively fs39 following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 1494 957 1543 december 31 2012 2011 2010 respectively note 12 properties plant equipment1 united states nigeria australia country accounted 10 percent company’s net properties plant equipment ppe 2012 nigeria ppe 17485 15601 13896 2012 2011 2010 respectively australia 21770 12423 2012 2011 respectively net dry hole expense related prior years’ expenditures 80 45 82 2012 2011 2010 respectively includes properties acquired acquisition atlas energy inc 2011 depreciation expense includes accretion expense 629 628 513 2012 2011 2010 respectively primarily mining operations power generation businesses real estate assets management information systems note 13 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party six pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim represen fs40 tatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify fs41 amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first second interim awards international arbitration tribunal discussed march 29 2012 matter transferred provincial court national court justice november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court lago agrio approved courtappointed liquidator’s report damages calculated total judgment case 19100 chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment june 27 2012 lago agrio plaintiffs filed action chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment october 15 2012 provincial court lago agrio issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary ingeniero nortberto priu requiring shares companies embargoed requiring third parties withhold 40 payments due chevron argentina srl ordering banks withhold 40 funds chevron argentina srl bank accounts december 14th 2012 argentinean court rejected motion revoke freeze order modified ordering third parties required withhold funds must report payments court also clarified freeze order relating bank accounts excludes taxes january 30 2013 appellate court upheld freeze order chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador enforcement action chevron expects continue vigorous defense imposition liability ecuadorian courts contest defend enforcement actions chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 tribunal issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal january 25 2012 tribunal converted order interim measures interim award chevron filed renewed application interim measures january 4 2012 republic ecuador opposed chevron’s application requested existing order interim measures vacated january 9 2012 february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron particular preclude certification republic ecuador would cause judgment enforceable chevron february 27 2012 tribunal issued third interim award confirming fs42 jurisdiction hear chevrons arbitration claims april 9 2012 tribunal issued scheduling order hear issues relating scope settlement release agreements republic ecuador texpet july 9 2012 tribunal indicated wanted hear remaining issues january 2014 february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” schedule tribunal’s order show cause hearing issued separately series us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes award damages declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable march 7 2011 federal district court issued preliminary injunction prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case pending resolution chevron’s civil lawsuit federal district court may 31 2011 federal district court severed claims one eight chevron’s complaint ninth claim declaratory relief imposed discovery stay claims one eight pending trial ninth claim declaratory relief september 19 2011 us court appeals second circuit vacated preliminary injunction stayed trial chevron’s ninth claim declaratory relief set november 14 2011 denied defendants’ mandamus petition recuse judge hearing lawsuit second circuit issued opinion january 26 2012 ordering dismissal chevron’s ninth claim declaratory relief february 16 2012 federal district court lifted stay claims one eight october 18 2012 federal district court set trial date october 15 2013 ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’ submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 14 taxes income taxes 2012 beforetax income us operations including related corporate charges 8456 compared beforetax income 10222 6528 2011 2010 respectively international operations beforetax income 37876 37412 25527 2012 2011 2010 respectively us federal income tax expense reduced 165 191 162 2012 2011 2010 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table fs43 company’s effective tax rate decreased slightly 433 percent 2011 432 percent 2012 impact lower effective tax rates international upstream operations essentially offset foreign currency remeasurement impacts periods international upstream lower effective tax rates current period driven primarily effects asset sales onetime tax benefits reduced withholding taxes partially offset lower utilization tax credits current year company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2012 increased approximately 700 yearend 2011 increase related increased temporary differences property plant equipment deferred tax assets increased approximately 4300 2012 increases primarily related additional us foreign tax credits arising earnings hightaxrate international jurisdictions substantially offset valuation allowance future international tax benefits earned overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2012 company tax loss carryforwards approximately 2009 tax credit carryforwards approximately 1146 primarily related various international tax jurisdictions whereas tax loss carryforwards expira tion date others expire various times 2013 2029 us foreign tax credit carryforwards 10817 expire 2013 2022 december 31 2012 2011 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 26527 december 31 2012 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable possible remittance earnings intended reinvested indefinitely end 2012 deferred income taxes recorded undistributed earnings certain international operations indefinite reinvestment earnings planned company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions accounting standards uncertainty income taxes asc 74010 company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2012 2011 2010 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included fs44 decrease unrecognized tax benefits december 31 2011 december 31 2012 primarily due new information received fourth quarter 2012 regarding sustainability certain us foreign tax credits reduction unrecognized tax benefits related foreign tax credits impact effective tax rate since deferred tax asset recognized foreign tax credits offset full valuation allowance approximately 67 percent 3071 unrecognized tax benefits december 31 2012 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2012 jurisdictions latest years income tax examinations finalized follows united states 2007 nigeria 2000 angola 2001 saudi arabia 2003 kazakhstan 2006 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits company currently assessing potential impact august 2012 decision us court appeals third circuit disallows historic rehabilitation tax credits hrtcs claimed unrelated taxpayer company claimed significant amount hrtcs us federal income tax returns open years reasonably possible specific findings managements ongoing assessment evaluation could result significant increase companys unrecognized tax benefit within next 12 months increase would impact effective tax rate consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2012 accruals 293 anticipated interest penalty obligations included consolidated balance sheet compared accruals 118 yearend 2011 income tax expense benefit associated interest penalties 145 64 40 2012 2011 2010 respectively taxes income fs45 note 15 shortterm debt weightedaverage interest rates december 31 2012 2011 013 percent 004 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2012 company interest rate swaps shortterm debt december 31 2012 company 6000 committed credit facilities various major banks expiring december 2016 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2012 december 31 2012 2011 company classified 5900 5600 respectively shortterm debt longterm settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis note 16 longterm debt total longterm debt excluding capital leases december 31 2012 11966 company’s longterm debt outstanding yearend 2012 2011 follows guarantee esop debt weightedaverage interest rate december 31 2012 2011 november 2012 company filed sec automatic registration statement expires 2015 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt 6086 matures follows 2013 20 2014 23 2015 0 2016 0 2017 2000 2017 4043 december 2012 4000 chevron corporation bonds issued 2000 chevron corporation 395 bonds due 2014 redeemed early see note 8 beginning page fs33 information concerning fair value company’s longterm debt fs46 note 17 new accounting standards balance sheet topic 210 disclosures offsetting assets liabilities asu 201111 december 2011 fasb issued asu 201111 became effective company january 1 2013 standard amends expands disclosure requirements offsetting related arrangements company anticipate impacts results operations financial position liquidity guidance becomes effective comprehensive income topic 220 reporting amounts reclassified accumulated comprehensive income asu 201302 fasb issued asu 201302 february 2013 standard became effective company january 1 2013 asu 201302 changes presentation requirements significant reclassifications accumulated comprehensive income entirety corresponding effect net income significant amounts required reclassified entirety standard requires company crossreference related footnote disclosures adoption standard expected significant impact companys financial statement presentation note 18 accounting suspended exploratory wells accounting standards costs exploratory wells asc 932 provide exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b entity making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense note entity required complete exploratory well producing well accounting standards provide number indicators assist entity demonstrating sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2012 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 2180 exploratory well costs capitalized one year december 31 2012 1359 23 projects related projects drilling activities way firmly planned near future 821 balance related 23 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development fs47 projects 821 referenced following activities associated assessing reserves projects’ economic viability 359 six projects undergoing frontend engineering design final investment decision expected within three years b 218 four projects development concept review government c 202 five projects development alternatives review 42 eight projects miscellaneous activities projects smaller amounts suspended progress made 46 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects however majority decisions expected occur next three years 2180 suspended well costs capitalized period greater one year december 31 2012 represents 166 exploratory wells 46 projects tables contain aging costs well project basis note 19 stock options sharebased compensation expense stock options 2012 2011 2010 283 184 tax 265 172 tax 229 149 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 177 115 tax 214 139 tax 194 126 tax 2012 2011 2010 respectively significant stockbased compensation cost capitalized december 31 2012 december 31 2011 cash received payment option exercises sharebased payment arrangements 2012 2011 2010 753 948 385 respectively actual tax benefits realized tax deductions option exercises 101 121 66 2012 2011 2010 respectively cash paid settle performance units stock appreciation rights 123 151 140 2012 2011 2010 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2012 contractual terms vary three years performance units 10 years stock options stock appreciation rights unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans unexercised awards began expiring early 2010 continue expire early 2015 fs48 fair market values stock options stock appreciation rights granted 2012 2011 2010 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2012 presented total intrinsic value ie difference exercise price market price options exercised 2012 2011 2010 580 668 259 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2012 255 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plans cost expected recognized weightedaverage period 17 years january 1 2012 number ltip performance units outstanding equivalent 2881836 shares 2012 888350 units granted 882003 units vested cash proceeds distributed recipients 60426 units forfeited december 31 2012 units outstanding 2827757 fair value liability recorded instruments 320 addition outstanding stock appreciation rights awards granted various ltip former unocal programs totaled approximately 24 million equivalent shares december 31 2012 liability 71 recorded awards note 20 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company accounting standards postretirement benefits asc 715 company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet fs49 funded status company’s pension postretirement benefit plans 2012 2011 follows amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2012 2011 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 9742 9279 end 2012 2011 respectively amounts consisted accumulated benefit obligations us international pension plans 12108 5167 respectively december 31 2012 11198 4518 respectively december 31 2011 fs50 information us international pension plans accumulated benefit obligation excess plan assets december 31 2012 2011 components net periodic benefit cost amounts recognized comprehensive income 2012 2011 2010 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2012 company’s us pension international pension opeb plans amortized straightline basis approximately 10 13 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2013 company estimates actuarial losses 472 143 54 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 230 recognized “accumulated comprehensive loss” 2013 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2012 approximately 10 13 years us international pension plans respectively 11 years postretirement benefit plans 2013 company estimates prior service credits costs 1 22 50 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs51 assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2012 company used expected longterm rate return 75 percent us pension plan assets account 70 percent company’s pension plan assets 2011 2010 company used longterm rate return 78 percent plan marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds december 31 2012 company used 36 percent discount rate us pension plans 39 percent main us opeb plan discount rates end 2011 2010 38 40 percent 48 50 percent us pension plans main us opeb plans respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2012 main us postretirement medical plan assumed health care costtrend rates start 75 percent 2013 gradually decline 45 percent 2025 beyond measurement december 31 2011 assumed health care costtrend rates started 8 percent 2012 gradually declined 5 percent 2023 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan 1percentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy fair value hierarchy inputs company uses value pension assets divided three levels level 1 fair values assets measured using unadjusted quoted prices assets prices identical assets active markets plans ability access level 2 fair values assets measured based quoted prices similar assets active markets quoted prices identical similar assets inactive markets inputs quoted prices observable asset inputs fs52 derived principally corroborated observable market data correlation means asset contractual term level 2 input observable substantially full term asset fair values level 2 assets generally obtained thirdparty broker quotes independent pricing services exchanges level 3 inputs fair value measurement unobservable assets valuation may performed using financial model estimated inputs entered model fair value measurements company’s pension plans 2012 2011 us equities include investments company’s common stock amount 27 december 31 2012 35 december 31 2011 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 fs53 effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 87 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys benefit plan investment committee established following approved asset allocation ranges equities 4070 percent fixed income cash 2065 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines reviewed regularly equities 5070 percent fixed income cash 3050 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset class risk mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2012 company contributed 844 384 us international pension plans respectively 2013 company expects contributions approximately 650 350 us international pension plans respectively actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 228 2013 compared 199 paid 2012 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop described section follows total company matching contributions employee accounts within esip 286 263 253 2012 2011 2010 respectively cost reduced value shares released lesop totaling 43 38 97 2012 2011 2010 fs54 respectively remaining amounts totaling 243 225 156 2012 2011 2010 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted accounting standards sharebased compensation asc 718 debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total expense credits lesop 1 2012 2011 2010 respectively net credit respective years composed credits compensation expense 2 5 6 charges interest expense lesop debt 3 4 5 dividends paid lesop shares 18 46 used 2012 2011 2010 respectively service lesop debt contributions required 2011 2010 dividends received lesop sufficient satisfy lesop debt service 2012 company contributed 2 lesop shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2012 2011 follows benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2012 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2012 2011 trust assets 48 51 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate unit individual performance prior year charges expense cash bonuses 898 1217 766 2012 2011 2010 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 19 beginning page fs48 note 21 equity retained earnings december 31 2012 2011 included approximately 10119 10127 respectively company’s share undistributed earnings equity affiliates december 31 2012 55 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron ltip addition approximately 231000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 22 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 14 beginning page fs43 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return discussed page fs45 chevron currently assessing potential impact decision us court appeals third circuit disallows historic rehabilita fs55 tion tax credits claimed unrelated taxpayer reasonably possible specific findings assessment could result significant increase unrecognized tax benefits may material effect companys results operations one reporting period company expect settlement income tax liabilities associated uncertain tax positions material effect consolidated financial position liquidity guarantees company’s guarantee 562 associated certain payments terminal use agreement entered equity affiliate approximate 15year remaining term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments end 2012 company paid 48 indemnities continues obligated 250 possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims asserted february 2009 equilon indemnities february 2012 motiva indemnities february 2012 motiva enterprises llc delivered letter company purporting preserve unmatured claims certain motiva indemnities company previously provided negative response similar claims letter provides estimate ultimate claim amount management believe letter information provides basis estimate amount range loss potential range loss respect either equilon motiva indemnities company posts assets collateral made payments indemnities december 31 2012 company received correspondence equilon motiva enterprises llc company expect action occur related indemnities described preceding paragraphs acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2013 3700 2014 3900 2015 4100 2016 2400 2017 1800 2018 6500 portion commitments may ultimately shared project partners total payments agreements approximately 3600 2012 6600 2011 6500 2010 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required fs56 determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2012 1403 included balance remediation activities approximately 175 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2012 157 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2012 environmental reserves balance 1246 782 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 464 associated various sites international downstream 93 upstream 309 businesses 62 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2012 recorded liability mate rial company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 23 page fs58 discussion company’s asset retirement obligations contingencies april 26 2010 california appeals court issued ruling related adequacy environmental impact report eir supporting issuance certain permits city richmond california replace upgrade certain facilities chevron’s refinery richmond settlement discussions plaintiffs case ended late fourth quarter 2010 march 3 2011 trial court entered final judgment peremptory writ ordering city set aside project eir conditional use permits enjoining chevron work may 23 2011 company filed application city planning department conditional use permit revised project complete construction hydrogen plant certain sulfur removal facilities related infrastructure june 10 2011 city published notice preparation revised eir project revised recirculated eir intended comply appeals court decision management believes outcomes associated project uncertain due uncertainty company’s future course action potential outcomes action combination actions management believe estimate financial effects made time chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods fs57 note 23 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2012 2011 2010 longterm portion 13271 balance end 2012 12375 note 24 financial information earnings 2012 included gains approximately 2800 relating sale nonstrategic properties amount approximately 2200 600 related upstream downstream assets respectively earnings 2011 included gains approximately 1300 relating sale nonstrategic properties amount approximately 800 500 related downstream upstream assets respectively financial information follows includes 202 27 71 2012 2011 2010 respectively company’s share equity affiliates’ foreign currency effects excess replacement cost carrying value inventories lastin firstout lifo method used 9292 9025 december 31 2012 2011 respectively replacement cost generally based average acquisition costs year lifo profits charges 121 193 21 included earnings years 2012 2011 2010 respectively company 4640 goodwill consolidated balance sheet related 2005 acquisition unocal 2011 acquisition atlas energy inc accounting standard goodwill asc 350 company tested goodwill impairment 2012 concluded impairment necessary fs58 note 25 earnings per share basic earnings per share eps based upon “net income attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 19 “stock options sharebased compensation” beginning page fs48 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings fs59 note 26 acquisition atlas energy inc february 17 2011 company acquired atlas energy inc atlas held one premier acreage positions marcellus shale concentrated southwestern pennsylvania aggregate purchase price atlas approximately 4500 included 3009 cash common shares atlas 403 cash advance facilitate atlas purchase 49 percent interest laurel mountain midstream llc 1100 assumed debt subsequent close transaction company paid assumed debt made payments 184 connection atlas equity awards part acquisition chevron assumed terms carry arrangement whereby reliance marcellus llc funds 75 percent chevrons drilling costs 1300 acquisition accounted business combination asc 805 among things requires assets acquired liabilities assumed measured acquisition date fair values provisional fair value measurements made first quarter 2011 acquired assets assumed liabilities measurement process finalized fourth quarter 2011 proforma financial information presented would materially different information presented consolidated statement income following table summarizes measurement assets acquired liabilities assumed properties measured primarily using income approach fair values acquired oil gas properties based significant inputs observable market thus represent level 3 measurements refer note 8 beginning page fs33 definition fair value hierarchy levels significant inputs included estimated resource volumes assumed future production profiles estimated future commodity prices discount rate 8 percent assumptions timing amount future operating development costs properties united states included upstream segment acquisition date fair value consideration transferred 3400 cash 27 goodwill assigned upstream segment represents amount consideration transferred excess values assigned individual assets acquired liabilities assumed goodwill represents future economic benefits arising assets acquired could individually identified separately recognized none goodwill deductible tax purposes goodwill recorded acquisition subject amortization tested periodically impairment required applicable accounting standard asc 350 fs60 fiveyear financial summary unaudited fs61 accordance fasb sec disclosure reporting requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information table costs incurred exploration property acquisitions development1 fs62 company’s estimated net provedreserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally angola chad democratic republic congo nigeria republic congo asia geographic area includes activities principally azerbaijan bangladesh china indonesia kazakhstan myanmar partitioned zone kuwait saudi arabia philippines thailand europe geographic area includes activity denmark netherlands norway united kingdom americas geographic region includes activities argentina brazil canada colombia trinidad tobago amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies amounts composed company’s equity interests venezuela angola refer note 11 beginning page fs38 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs63 fs64 company’s results operations oil gas producing activities years 2012 2011 2010 shown following table net income exploration production activities reported page fs37 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs37 table iii results operations oil gas producing activities 1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 23 “asset retirement obligations” page fs58 includes foreign currency gains losses gains losses property dispositions primarily related browse wheatstone gains 2012 miscellaneous income expenses 2011 2010 conformed 2012 presentation fs65 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 23 “asset retirement obligations” page fs58 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses 2011 2010 conformed 2012 presentation fs66 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel 2011 2010 conformed 2012 presentation table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager corporate reserves corporate department reports directly vice chairman responsible company’s worldwide exploration production activities manager corporate reserves 30 years’ experience working oil gas industry master science petroleum engineering degree stanford university experience includes 15 years managing oil gas reserves processes chairman society petroleum engineers oil gas reserves committee served united nations expert group resources classification past member joint committee reserves evaluator training california conservation committee active member society petroleum evaluation engineers serves society petroleum engineers oil gas reserves committee rac members degreed professionals 15 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates reserves activities managed two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence fs67 summary net oil gas reserves based 12month average price rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance corporate reserves manual technologies used establishing proved reserves additions 2012 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates fs68 proved undeveloped reserve quantities end 2012 proved undeveloped reserves totaled 52 billion barrels oilequivalent boe approximately 56 percent reserves attributed natural gas 55 percent located australia crude oil condensate natural gas liquids ngls accounted 38 percent total proved undeveloped reserves 38 percent tco remaining large concentrations africa asia united states synthetic oil accounted balance proved undeveloped reserves 2012 total 394 million boe transferred proved undeveloped proved developed asia 98 million boe transferred proved developed primarily driven development drilling performance united states approximately 95 million boe transferred primarily due ongoing drilling activities deepwater gulf mexico california affiliates accounted 104 million boe transferred proved developed due ongoing development activities development drilling start several projects africa europe americas accounted remainder investment convert proved undeveloped proved developed reserves 2012 investments totaling approximately 107 billion oil gas producing activities 35 billion nonoil gas producing activities expended advance development proved undeveloped reserves australia accounted 77 billion total mainly development construction activities gorgon wheatstone lng projects africa another 23 billion expended various offshore development natural gas projects nigeria angola expenditures 18 billion united states related primarily various development activities gulf mexico midcontinent region asia expenditures year totaled 17 billion primarily related development projects thailand indonesia proved undeveloped reserves five years reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2012 company held approximately 17 billion boe proved undeveloped reserves remained undeveloped five years reserves held consolidated affiliated companies majority reserves locations company proven track record developing major projects africa majority 300 million boe related deepwater natural gas developments nigeria major nigerian deepwater development projects include agbami started production 2008 ongoing development activities maintain full utilization infrastructure capacity usan development started production 2012 also nigeria various fields infrastructure associated escravos gas projects currently development asia approximately 200 million boe remain classified proved undeveloped five years majority relate ongoing development activities pattani field thailand malampaya field philippines scheduled maintain production within contractual infrastructure constraints australia approximately 100 million boe remain classified proved undeveloped due compression project north west shelf venture scheduled startup 2013 affiliated companies approximately 10 billion boe proved undeveloped reserves recorded five years tco affiliate kazakhstan accounts amount production constrained plant capacity limitations venezuela development drilling continues hamaca optimize utilization upgrader capacity annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2012 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 37 percent 46 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities december 31 2012 proved reserves company 113 billion boe refer term “reserves” page e11 definition oilequivalent reserves approximately 17 percent total reserves located united states aside tco affiliates tengiz field kazakhstan single property accounted 5 percent company’s total oilequivalent proved reserves 20 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted 45 percent company’s total oilequivalent proved reserves properties geographically dispersed located united states canada south america africa asia australia fs69 united states total proved reserves yearend 2012 20 billion boe california properties accounted 32 percent us reserves classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods company’s heavyoil fields california employ continuous steamflooding process gulf mexico region contains 26 percent us reserves production operations mostly offshore us areas represent remaining 42 percent us reserves production crude oil fields utilize enhanced recovery methods including waterflood co2 injection three years ending december 31 2012 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved reserves crude oil condensate natural gas liquids synthetic oil changes thereto years 2010 2011 2012 shown table company’s estimated net proved reserves natural gas shown page fs72 net proved reserves crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 121 13 14 south america 102 100 94 2012 2011 2010 respectively reserves associated canada ending reserve balances africa 41 38 36 south america 123 119 121 2012 2011 2010 respectively included yearend reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 20 percent 22 percent 24 percent consolidated companies 2012 2011 2010 respectively fs70 noteworthy amounts categories liquids proved reserve changes 2010 2012 discussed revisions 2010 net revisions increased reserves 82 million barrels consolidated companies improved reservoir performance accounted majority 63 million barrel increase united states increases regions partially offset asia decreased result effect higher prices entitlement volumes kazakhstan affiliated companies price effect entitlement volumes tco decreased reserves 33 million barrels 2011 net revisions increased reserves 235 million barrels consolidated companies improved reservoir performance accounted majority 63 million barrel increase united states africa improved field performance drove 60 million barrel increase asia increases improved reservoir performance partially offset effects higher prices entitlement volumes synthetic oil reserves canada increased 32 million barrels primarily due geotechnical revisions affiliated companies improved facility reservoir performance partially offset price effect entitlement volumes tco 2012 net revisions increased reserves 390 million barrels improved field performance drilling associated gulf mexico projects accounted majority 104 million barrel increase united states asia drilling results across numerous assets drove 97 million barrel increase improved field performance various nigeria angola producing assets primarily responsible 66 million barrel increase africa improved plant efficiency tco affiliate responsible large portion 59 million barrel increase improved recovery 2010 improved recovery increased volumes 77 million barrels reserves africa increased 58 million barrels due primarily secondary recovery performance nigeria 2011 improved recovery increased volumes 58 million barrels reserves africa increased 48 million barrels due primarily secondary recovery performance nigeria 2012 improved recovery increased reserves 77 million barrels primarily due secondary recovery performance africa gulf mexico fields united states extensions discoveries 2010 extensions discoveries increased reserves 63 million barrels united states americas increased reserves 19 million barrels asia increased reserves 16 million barrels single area united states individually significant drilling activity argentina brazil accounted majority increase americas asia increase primarily related activity azerbaijan 2011 extensions discoveries increased reserves 299 million barrels united states additions related two gulf mexico projects resulted majority 140 million barrel increase australia wheatstone project increased liquid volumes 65 million barrels africa americas increased reserves 34 million 30 million barrels respectively following start new projects areas europe project united kingdom increased reserves 26 million barrels 2012 extensions discoveries increased reserves 218 million barrels americas extensions discoveries increased reserves 101 million barrels primarily due initial booking hebron project canada united states additions several gulf mexico projects drilling activities midcontinent region primarily responsible 77 million barrel increase purchases 2011 purchases increased worldwide liquid volumes 42 million barrels acquisition additional acreage canada increased synthetic oil reserves 40 million barrels fs71 net proved reserves natural gas ending reserve balances north america south america 49 19 21 1426 1645 1794 2012 2011 2010 respectively ending reserve balances africa south america 1068 1016 953 174 187 157 2012 2011 2010 respectively total “as sold” volumes 1647 bcf 1591 bcf 1644 bcf 2012 2011 2010 respectively includes reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 21 percent 21 percent 29 percent consolidated companies 2012 2011 2010 respectively noteworthy amounts categories natural gas provedreserve changes 2010 2012 discussed revisions 2010 net revisions decreased reserves 71 bcf consolidated companies net increase united states 220 bcf primarily midcontinent area gulf mexico result number small upward revisions related improved reservoir performance drilling activity none individually significant increase partially offset downward revisions due impact higher prices entitlement volumes asia equity affiliates downward revision 324 bcf tco due price effect entitlement volumes change variableroyalty calculation decline partially offset recognition additional reserves related angola lng project 2011 net revisions increased reserves 497 bcf consolidated companies improved reservoir performance accounted majority 217 bcf increase united states asia net increase 196 bcf driven development drilling improved field performance thailand partially offset effects higher prices entitlement volumes kazakhstan affiliated companies ongoing reservoir assessment resulted recognition additional reserves related angola lng project tco improved facility reservoir performance offset price effect entitlement volumes fs72 2012 net revisions increased reserves 1855 bcf net increase 1007 bcf asia primarily due development drilling additional compression bangladesh drilling results improved field performance thailand australia updated reservoir data interpretation based additional drilling gorgon project drove 358 bcf increase drilling results activities marcellus shale responsible majority 318 bcf increase united states extensions discoveries 2011 extensions discoveries increased reserves 4680 bcf australia wheatstone project accounted 4035 bcf additions africa start new natural gas development project nigeria resulted 290 bcf increase united states development drilling accounted majority 287 bcf increase 2012 extensions discoveries increased reserves 1011 bcf increase 747 bcf australia primarily related positive drilling results gorgon project purchases 2011 purchases increased reserves 1233 bcf united states acquisitions marcellus shale increased reserves 1230 bcf sales 2011 sales decreased reserves 174 bcf australia wheatstone project unitization equity sales agreements reduced reserves 77 bcf united states sales alaska smaller fields reduced reserves 95 bcf 2012 sales decreased reserves 538 bcf sales portion companys equity interest wheatstone project responsible 439 bcf reserves reduction australia fs73 standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fasb estimated future cash inflows production computed applying 12month average prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations valuation prescribed fasb requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows table vi standardized measure discounted future net cash flows related proved oil gas reserves based 12month average price 2011 2010 conformed 2012 presentation fs74 changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” table vii changes standardized measure discounted future net cash flows proved reserves 2011 2010 conformed 2012 presentation fs75 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 36 schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 15 consolidated financial statements beginning page fs43 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 21st day february 2014 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 21st day february 2014 principal executive officers directors sjohn watson john watson chairman board chief executive officer linnet f deily linnet f deily sgeorge l kirkland george l kirkland vice chairman board robert e denham robert e denham alice p gast alice p gast enrique hernandez jr enrique hernandez jr principal financial officer jon huntsman jr jon huntsman jr spatricia e yarrington patricia e yarrington vice president chief financial officer charles w moorman charles w moorman kevin w sharer kevin w sharer principal accounting officer smatthew j foehr matthew j foehr vice president comptroller john g stumpf john g stumpf ronald sugar ronald sugar slydia beebe lydia beebe attorneyinfact carl ware carl ware fs1 key financial results refer “results operations” section beginning page fs6 discussion financial results major operating area three years ended december 31 2013 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark indonesia kazakhstan myanmar netherlands nigeria norway partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend mostly profitability upstream downstream business segments biggest factor affecting results operations company price crude oil downstream business crude oil largest cost component refined products seasonality primary driver changes company’s quarterly earnings year sustain longterm competitive position upstream business company must develop replenish inventory projects offer attractive financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states time certain governments sought renegotiate contracts impose additional costs company governments may attempt future civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning page fs6 discussions net gains asset sales 2013 asset dispositions restructurings may also occur future periods could result significant gains losses company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit fs2 company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control external factors include general level inflation also commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services recent years chevron oil gas industry generally experienced increase certain costs exceeded general trend inflation many areas world capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 109 per barrel fullyear 2013 compared 112 2012 midfebruary 2014 brent price 109 per barrel majority company’s equity crude production priced based brent benchmark wti price averaged 98 per barrel fullyear 2013 compared 94 2012 midfebruary 2014 wti price 100 per barrel wti continued trade discount brent 2013 due historically high inventories stemming strong growth domestic production limitations outbound pipeline capacity us midcontinent narrowing first six months 2013 wti discount slowly widened fourth quarter seasonal refinery turnarounds contributed surplus supply conditions wti brent prices supported supply disruptions due international events differential crude oil prices exists highquality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated supply heavy crude versus demand function capacity refineries able process lower quality feedstock light products motor gasoline jet fuel aviation gasoline diesel fuel 2013 differential north american light heavy crude oil remained historical norms due growth us light sweet crude production midcontinent region pipeline capacity constraints cushing outside north america lightheavy crude differential narrowed modestly 2013 supply disruptions key producing countries tightened light sweet crude markets additional heavy crude oil conversion capacity came online chevron produces shares production heavy crude oil california chad indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs10 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets united states prices henry hub averaged 370 per thousand cubic feet mcf 2013 compared 271 2012 midfebruary 2014 henry hub spot price 553 per fs3 mcf fluctuations price natural gas united states closely associated customer demand relative volumes produced north america outside united states price changes natural gas depend wide range supply demand regulatory circumstances locations chevron investing longterm projects install infrastructure produce liquefy natural gas transport tanker markets international natural gas realizations averaged 591 per mcf 2013 compared 599 per mcf 2012 see page fs10 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2013 averaged 2597 million barrels per day onefifth company’s net oilequivalent production 2013 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait opec quotas effect company’s net crude oil production 2013 2012 december 2013 meeting members opec supported maintaining current production quota 30 million barrels per day effect since december 2008 company estimates oilequivalent production 2014 average approximately 2610 million barrels per day based average brent price 109 per barrel fullyear 2013 estimate subject many factors uncertainties including quotas may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states refer “results operations” section pages fs6 fs8 additional discussion company’s upstream business refer table v beginning page fs64 tabulation company’s proved net oil gas reserves geographic area beginning 2011 yearend 2011 2013 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2013 november 7 2011 drilling development well deepwater frade field 75 miles offshore brazil unanticipated pressure spike caused oil migrate well bore series fissures sea floor emitting approximately 2400 barrels oil source seep substantially contained within four days well plugged abandoned march 14 2012 company identified small second seep different part field evidence coastal wildlife impacts fs4 related seeps emerged brazilian federal district prosecutor filed two civil lawsuits seeking 107 billion damages two seeps october 1 2013 court dismissed two civil lawsuits approved settlement chevron consortium partners agreed spend approximately 43 million social environmental programs november 11 2013 court announced settlement final federal district prosecutor also filed criminal charges chevron eleven chevron employees february 19 2013 court dismissed criminal matter appeal appellate court reinstated two ten allegations specifically charges alleging environmental damage failure provide timely notification authorities company assessing legal options company’s ultimate exposure related incident currently determinable could significant net income one period downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast asia southern africa chevron operates significant ownership interests refineries areas refer “results operations” section pages fs6 fs8 additional discussion company’s downstream operations consists mining operations power energy services worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies operating developments key operating developments events 2013 early 2014 included following upstream angola first shipment liquefied natural gas made angola lng project argentina signed agreements advancing loma compana project develop vaca muerta shale australia signed binding longterm lng sales purchase agreements two asian customers binding longterm agreements cover approximately 85 percent chevron’s equity lng offtake wheatstone project announced two natural gas discoveries carnarvon basin include discoveries 50 percentowned operated kentish knock south prospect block wa365p 50 percentowned operated elfin prospect block wa268p reached agreement acquire interests two onshore natural gas blocks cooper basin region central australia acquired exploration interests two blocks located deepwater bight basin offshore south australia brazil confirmed start crude oil production papaterra field awarded participation deepwater block ceará basin canada announced agreement acquire additional complementary acreage duvernay shale announced successful conclusion initial twelvewell exploration drilling program liquidsrich portion duvernay shale located western canada kurdistan region iraq announced acquisition 80 percent interest operatorship qara dagh block republic congo announced final investment decision deepwater moho nord project united states announced joint development agreement additional delaware basin acreage access related infrastructure announced crude oil discovery coronado prospect deepwater gulf mexico announced successful production test st malo well deepwater gulf mexico fs5 downstream south korea companys 50 percentowned gs caltex affiliate started commercial operations gas oil fluid catalytic cracking unit yeosu refinery united states companys 50 percentowned chevron phillips chemical company llc cpchem announced final investment decision us gulf coast petrochemicals project include ethane cracker annual design capacity 15 million metric tons per year two polyethylene facilities annual design capacity 500000 metric tons per year cpchem announced plans expand annual ethylene production 200 million pounds sweeny complex old ocean texas common stock dividends quarterly common stock dividend increased 111 percent april 2013 100 per common share making 2013 26th consecutive year company increased annual dividend payment common stock repurchase program company purchased 50 billion common stock 2013 share repurchase program began 2010 set term monetary limits results operations major operating areas following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 11 beginning page fs35 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream us upstream earnings 40 billion 2013 decreased 13 billion 2012 primarily due higher operating depreciation exploration expenses 420 million 350 million 190 million respectively lower crude oil production 170 million higher natural gas realizations approximately 200 million mostly offset lower crude oil realizations 170 million us upstream earnings 53 billion 2012 decreased 12 billion 2011 primarily due lower natural gas crude oil realizations 340 million 200 million respectively lower crude oil production 240 million lower gains asset sales 180 million company’s average realization us crude oil natural gas liquids 2013 9346 per barrel compared 9521 2012 9751 2011 average natural gas realization 337 per thousand cubic feet 2013 compared 264 404 2012 2011 respectively net oilequivalent production 2013 averaged 657000 barrels per day essentially unchanged 2012 3 percent 2011 2013 2012 new production marcellus shale western pennsylvania delaware basin new mexico along absence weatherrelated downtime gulf mexico largely offset normal field declines decrease production 2012 2011 associated normal field declines absence volumes associated cook inlet alaska assets sold 2011 partially offsetting decrease rampup projects gulf mexico marcellus shale improved operational performance gulf mexico net liquids component oilequivalent production 2013 averaged 449000 barrels per day 1 percent 2012 3 percent 2011 net natural gas production averaged 12 billion cubic feet per day 2013 approximately 4 percent 2012 3 percent 2011 refer “selected operating data” table page fs10 threeyear comparative production volumes united states fs6 international upstream international upstream earnings 168 billion 2013 compared 185 billion 2012 decrease mainly due absence 2012 gains approximately 14 billion asset exchange australia 600 million sale equity interest wheatstone project lower crude oil prices 500 million higher operating expense 400 million partially offsetting effects lower income tax expenses 430 million foreign currency effects increased earnings 559 million 2013 compared decrease 275 million year earlier international upstream earnings 185 billion 2012 compared 183 billion 2011 increase mainly due gain approximately 14 billion asset exchange australia higher natural gas realizations 610 million nearly 600 million gain sale equity interest wheatstone project mostly offsetting effects lower crude oil volumes 13 billion higher exploration expenses 430 million foreign currency effects decreased earnings 275 million 2012 compared increase 211 million year earlier company’s average realization international crude oil natural gas liquids 2013 10026 per barrel compared 10188 2012 10153 2011 average natural gas realization 591 per thousand cubic feet 2013 compared 599 539 2012 2011 respectively international net oilequivalent production 194 million barrels per day 2013 decreased 1 percent 2012 decreased 3 percent 2011 project rampups nigeria angola 2013 offset normal field declines decline 2012 2011 result new production thailand nigeria 2012 offset normal field declines shutin frade field brazil major planned turnaround tengizchevroil net liquids component international oilequivalent production 13 million barrels per day 2013 decrease approximately 2 percent 2012 decrease approximately 7 percent 2011 international net natural gas production 39 billion cubic feet per day 2013 2 percent 2012 8 percent 2011 refer “selected operating data” table page fs10 threeyear comparative international production volumes us downstream us downstream operations earned 787 million 2013 compared 20 billion 2012 decrease mainly due lower margins refined product sales 860 million higher operating expenses 600 million reflecting repair maintenance activities companys refineries decrease partially offset higher earnings 150 million 50 percentowned cpchem us downstream operations earned 20 billion 2012 compared 15 billion 2011 increase mainly due higher margins refined products sales 520 higher earnings 140 cpchem benefits partly offset higher operating expenses 130 million fs7 refined product sales 118 million barrels per day 2013 declined 2 percent mainly reflecting lower gas oil kerosene gasoline sales volumes refined products 121 million barrels per day 2012 decrease 4 percent 2011 mainly reflecting lower gasoline fuel oil sales us branded gasoline sales 517000 barrels per day 2013 essentially unchanged 2012 2011 refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 15 billion 2013 compared 23 billion 2012 earnings decreased due lower gains asset sales 540 million higher income tax expenses 110 million foreign currency effects decreased earnings 76 million 2013 compared 173 million year earlier international downstream earned 23 billion 2012 compared 21 billion 2011 earnings increased due favorable change effects derivative instruments 190 million higher margins refined product sales 100 million foreign currency effects decreased earnings 173 million 2012 compared decrease 65 million year earlier refer “selected operating data” table page fs10 threeyear comparison sales volumes gasoline refined products refinery input volumes includes mining operations power energy services worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies net charges 2013 decreased 285 million 2012 mainly due lower corporate tax items corporate charges net charges 2012 increased 426 million 2011 mainly due higher environmental reserves additions corporate tax items corporate charges partially offset lower employee compensation benefits expenses fs8 consolidated statement income comparative amounts certain income statement categories shown sales operating revenues decreased 2013 mainly due lower refined product prices lower crude oil volumes prices decrease 2012 2011 mainly due 2011 sale company’s refining marketing assets united kingdom ireland lower crude oil volumes income equity affiliates increased 2013 2012 mainly due higher upstreamrelated earnings tengizchevroil kazakhstan petropiar venezuela higher earnings cpchem partially offset 2013 impairments powerrelated affiliates income equity affiliates decreased 2012 2011 mainly due lower upstreamrelated earnings tengizchevroil kazakhstan result lower crude oil production higher operating expenses angola lng limited petropiar venezuela downstreamrelated earnings higher comparative periods primarily due higher margins cpchem refer note 12 beginning page fs37 discussion chevron’s investments affiliated companies income 12 billion 2013 included net gains asset sales 710 million beforetax income 2012 2011 included net gains asset sales 42 billion 15 billion beforetax respectively interest income approximately 136 million 2013 166 million 2012 145 million 2011 foreign currency effects increased income 103 million 2013 decreasing income 207 million 2012 increasing income 103 million 2011 crude oil product purchases 1347 billion 2013 mainly due lower prices refined products lower volumes crude oil partially offset higher refined product volumes crude oil product purchases 2012 decreased 92 billion prior year mainly due 2011 sale company’s refining marketing assets united kingdom ireland lower natural gas prices operating selling general administrative expenses increased 18 billion 2013 2012 due higher employee compensation benefits costs 720 million construction maintenance expenses 590 million professional services costs 500 million operating selling general administrative expenses increased 900 million 2012 2011 mainly due higher contract labor professional services 590 million higher employee compensation benefits 280 million exploration expenses 2013 increased 2012 mainly due higher charges well writeoffs exploration expenses 2012 increased 2011 mainly due higher geological geophysical costs well writeoffs increase 2013 2012 mainly due higher depreciation rates certain oil gas producing fields higher upstream impairments higher accretion expense partially offset lower production levels increase 2012 2011 mainly due higher depreciation rates certain oil gas producing fields partially offset lower production levels taxes income increased 2013 2012 mainly due consolidation 64 percentowned star petroleum refining company beginning june 2012 higher consumer excise taxes united states taxes income decreased 2012 2011 primarily due lower import duties united kingdom reflecting sale company’s refining marketing assets united kingdom ireland 2011 partially offsetting decrease excise taxes associated consolidation star petroleum refining company beginning june 2012 fs9 effective income tax rates 40 percent 2013 43 percent 2012 43 percent 2011 decrease effective tax rate 2013 2012 primarily due lower effective tax rate international upstream operations lower international upstream effective tax rate driven greater portion equity income 2013 2012 equity income included part beforetax income generally recorded net income taxes foreign currency remeasurement impacts rate unchanged 2012 2011 impact lower effective tax rates international upstream operations offset foreign currency remeasurement impacts periods international upstream lower effective tax rates 2012 period driven primarily effects asset sales onetime tax benefits reduced withholding taxes partially offset lower utilization tax credits year selected operating data12 fs10 liquidity capital resources cash equivalents time deposits marketable securities total balances 165 billion 219 billion december 31 2013 2012 respectively cash provided operating activities 2013 350 billion compared 388 billion 2012 411 billion 2011 cash provided operating activities net contributions employee pension plans approximately 12 billion 12 billion 15 billion 2013 2012 2011 respectively cash provided investing activities included proceeds deposits related asset sales 11 billion 2013 28 billion 2012 35 billion 2011 restricted cash 12 billion 15 billion december 31 2013 2012 respectively held cash shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet amounts generally associated tax payments upstream abandonment activities funds held escrow asset acquisitions capital investment projects dividends paid common stockholders 75 billion 2013 68 billion 2012 61 billion 2011 april 2013 company increased quarterly dividend 111 percent 100 per common share debt capital lease obligations total debt capital lease obligations 204 billion december 31 2013 122 billion yearend 2012 82 billion increase total debt capital lease obligations 2013 included 6 billion bond issuance june 2013 timed part take advantage historically low interest rates company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 84 billion december 31 2013 compared 60 billion yearend 2012 amounts 80 billion 59 billion reclassified longterm end period respectively yearend 2013 settlement obligations expected require use working capital 2014 company intent ability evidenced committed credit facilities refinance longterm basis chevron automatic shelf registration statement expires november 2015 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s pl moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements company also modify capital spending plans extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals provide flexibility continue paying common stock dividend maintain company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 16 consolidated financial statements shortterm debt beginning page fs45 common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits company expects repurchase 500 million 2 billion common shares per quarter prevailing prices permitted securities laws legal requirements subject market conditions factors 2013 company purchased 416 million common shares 50 billion inception program 2013 company purchased 1393 million shares 150 billion fs11 capital exploratory expenditures 1 excludes acquisition atlas energy inc 2011 capital exploratory expenditures total expenditures 2013 419 billion including 27 billion company’s share equityaffiliate expenditures require cash outlays company 2012 2011 expenditures 342 billion 291 billion respectively including company’s share affiliates’ expenditures 21 billion 17 billion respectively expenditures 2013 include approximately 4 billion major resource acquisitions argentina australia permian basin kurdistan region iraq along additional acreage duvernay shale interests kitimat lng project canada addition work progressed number major capital projects particularly two australian lng projects two deepwater gulf mexico projects 419 billion expenditures 2013 90 percent 379 billion related upstream activities approximately 89 percent expended upstream operations 2012 2011 international upstream accounted 78 percent worldwide upstream investment 2013 72 percent 2012 68 percent 2011 amounts exclude acquisition atlas energy inc 2011 company estimates 2014 capital exploratory expenditures 398 billion including 48 billion spending affiliates approximately 90 percent total 358 billion budgeted exploration production activities approximately 279 billion 78 percent amount projects outside united states spending 2014 primarily focused major development projects angola argentina australia canada kazakhstan nigeria republic congo russia united kingdom us also included funding enhancing recovery mitigating natural field declines currentlyproducing assets focused exploration appraisal activities worldwide downstream spending 2014 estimated 31 billion 18 billion projects united states major capital outlays include projects construction refineries united states expansion additives production capacity singapore additional investments expected funded cpchem chemicals projects united states investments technology companies power energy services corporate businesses 2014 budgeted 1 billion noncontrolling interests company noncontrolling interests 13 billion december 31 2013 2012 distributions noncontrolling interests totaled 99 million 41 million 2013 2012 respectively pension obligations information related pension plan contributions included page fs53 note 21 consolidated financial statements heading “cash contributions benefit payments” fs12 financial ratios financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2013 book value inventory lower replacement costs based average acquisition costs year approximately 91 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2013 lower 2012 2011 due lower income debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage companys debt ratio 2013 higher 2012 2011 due higher debt partially offset higher stockholders equity balance guarantees offbalancesheet arrangements contractual obligations contingencies direct guarantees company’s guarantee 524 million associated certain payments terminal use agreement entered equity affiliate approximate 14year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications information related indemnifications included page fs55 note 23 consolidated financial statements heading “indemnifications” longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2014 42 billion 2015 45 billion 2016 32 billion 2017 26 billion 2018 22 billion 2019 69 billion portion commitments may ultimately shared project partners total payments agreements approximately 36 billion 2013 36 billion 2012 66 billion 2011 following table summarizes company’s significant contractual obligations contractual obligations1 excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 21 beginning page fs48 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 80 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20152016 period include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed next page estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2013 annual report form 10k fs13 derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2013 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies approved audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2013 material companys results operations company uses monte carlo simulation method 95 percent confidence level valueatrisk var model estimate maximum potential loss fair value effect adverse changes market conditions derivative commodity instruments held issued oneday holding period used assumption marketrisk positions liquidated hedged within one day based inputs var companys primary risk exposures area derivative commodity instruments december 31 2013 2012 material companys cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2013 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2013 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” note 12 consolidated financial statements page fs38 discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page fs39 note 14 consolidated financial statements heading “mtbe” ecuador information related ecuador matters included note 14 consolidated financial statements heading “ecuador” beginning page fs39 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws fs14 company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 143 billion asset retirement obligations yearend 2013 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2013 environmental expenditures refer note 23 pages fs55 fs56 additional discussion environmental remediation provisions yearend reserves refer also note 24 page fs56 additional discussion companys asset retirement obligations suspended wells information related suspended wells included note 19 consolidated financial statements accounting suspended exploratory wells beginning page fs46 income taxes information related income tax contingencies included pages fs43 fs45 note 15 pages fs54 fs55 note 23 consolidated financial statements heading “income taxes” contingencies information related contingencies included page fs56 note 23 consolidated financial statements heading “other contingencies” environmental matters virtually aspects businesses company engages subject various international federal state local environmental health safety laws regulations marketbased programs regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells regulations intended address concerns greenhouse gas emissions global climate change also continue evolve include international multinational mechanisms kyoto protocol european unions emissions trading system national us environmental protection agencys emission standards renewable transportation fuel content requirements domestic marketbased programs effect australia new zealand state regional californias global warming solutions act levels costs complying laws regulations pertaining company operations products embedded normal costs business possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect companys liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2013 approximately 27 billion consolidated companies included expenditures approximately 10 billion environmental capital expenditures 17 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2014 total worldwide environmental capital expenditures estimated 11 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known fs15 discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology economic conditions estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization proved reserves used amortizing capitalized costs related oil gas producing activities unitofproduction uop method capitalized exploratory drilling development costs depreciated uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2013 chevrons uop depreciation depletion amortization dda oil gas properties 116 billion proved developed reserves beginning 2013 48 billion barrels estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2013 would increased approximately 600 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review assessing whether property impaired fair value property must determined frequently discounted cash flow methodology best estimate fair value proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page fs64 changes proved reserve estimates three years ending december 31 2013 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs72 estimates proved reserve values three years ended december 31 2013 oil gas reserves commentary read conjunction properties plant equipment section note 1 consolidated financial statements beginning page fs27 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based fs16 assumptions consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 9 beginning page fs33 section properties plant equipment note 1 summary significant accounting policies beginning page fs27 material individual impairments ppe investments recorded three years ending december 31 2013 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2013 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 24 page fs56 additional discussions asset retirement obligations pension postretirement benefit plans note 21 beginning page fs48 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page fs48 note 21 relevant headings actual rates may vary significantly estimates unanticipated changes worlds financial markets 2013 company used expected longterm rate return 75 percent discount rate 36 percent us pension plans 10 years ending december 31 2013 actual asset returns averaged 64 percent plan actual return 2013 75 percent associated continuing recovery financial markets year additionally exception two years within 10year period actual asset returns plan equaled exceeded 75 percent total pension expense 2013 13 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 59 percent companywide pension expense would reduced total pension plan expense 2013 approximately 85 million 1 percent increase discount rate plan would reduced pension expense 2013 approximately 190 million aggregate funded status recognized december 31 2013 net liability approximately 24 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2013 company used discount rate fs17 43 percent measure obligations us pension plans indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 59 percent companywide pension obligation would reduced plan obligation approximately 345 million would increased plan’s overfunded status approximately 04 billion 07 billion company’s opeb plans expense 2013 218 million total liability reflected unfunded status plans end 2013 31 billion main us opeb plan company used 39 percent discount rate measure expense 2013 47 percent discount rate measure benefit obligations december 31 2013 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2013 opeb expense opeb liabilities end 2013 information sensitivity health care costtrend rate refer fs51 note 21 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page fs50 note 21 description method used amortize 52 billion beforetax actuarial losses recorded company december 31 2013 estimate costs recognized expense 2014 addition information related company contributions included page fs53 note 21 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 23 beginning page fs54 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2013 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 18 page fs46 notes consolidated financial statements information regarding new accounting standards fs18 quarterly results stock market data unaudited fs19 fs20 report independent registered public accounting firm fs21 consolidated statement income millions dollars except pershare amounts fs22 consolidated statement comprehensive income millions dollars fs23 consolidated balance sheet millions dollars except pershare amounts fs24 consolidated statement cash flows millions dollars fs25 consolidated statement equity shares thousands amounts millions dollars fs26 note 1 summary significant accounting policies general upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations relate primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses additives fuels lubricant oils company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories generally stated average cost fs27 properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page fs46 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 9 beginning page fs32 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 24 page fs56 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 24 page fs56 discussion company’s aros fs28 federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs22 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ending december 31 2013 reflected table changes accumulated comprehensive losses component 1 amounts net tax 2 refer note 21 employee benefits reclassified components totaling 839 included employee benefit costs year ending december 31 2013 related income taxes period totaling 313 reflected income tax expense consolidated statement income reclassified amounts insignificant fs29 note 3 noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” activity equity attributable noncontrolling interests 2013 2012 2011 follows includes components comprehensive income disclosed separately consolidated statement comprehensive income note 4 information relating consolidated statement cash flows “net increase decrease operating working capital” includes reductions 79 98 121 excess income tax benefits associated stock options exercised 2013 2012 2011 respectively amounts offset equal amount “net purchases treasury shares” includes changes postretirement benefits obligations longterm liabilities february 2011 company acquired atlas energy inc atlas aggregate purchase price approximately 4500 purchase price included assumption debt certain payments noted “acquisition atlas energy” reflects 3009 cash paid common shares atlas “advance atlas energy” 403 made facilitate purchase 49 percent interest laurel mountain midstream llc day closing “repayments longterm debt financing obligations” 2011 includes 761 repayment atlas debt 271 payoff atlas revolving credit facility “net increase decrease operating working capital” includes 184 payments made connection atlas equity awards subsequent acquisition remaining impacts acquisition material impact consolidated statement cash flows “net purchases treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 5004 4262 2013 2012 2011 respectively 2013 2012 2011 company purchased 416 million 466 million 423 million common shares 5000 4250 ongoing share repurchase program respectively 2013 2012 2011 “net sales purchases shortterm investments” generally consisted restricted cash associated tax payments upstream abandonment activities funds held escrow asset acquisitions capital investment projects invested cash shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet company issued 374 2011 tax exempt bonds source funds us refinery projects included “proceeds issuance longterm debt” consolidated statement cash flows excludes changes consolidated balance sheet affect cash 2012 period excludes effects 800 proceeds received future periods sale equity interest wheatstone project 82 received 2013 capital expenditures 2012 period excludes 1850 increase properties plant equipment related upstream asset exchange australia refer also note 24 page fs56 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2013 fs30 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 1661 2013 4569 2012 945 2011 note 5 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method 2012 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa summarized financial information cusa consolidated subsidiaries presented following table gives retroactive effect reorganizations occurred january 1 2011 however financial information following table may reflect financial position operating results periods presented reorganization occurred date summarized financial information cusa consolidated subsidiaries follows note 6 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries follows restrictions ctcs ability pay dividends make loans advances december 31 2013 fs31 note 7 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 12 page fs37 discussion tco operations summarized financial information 100 percent tco presented following table note 8 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2013 2012 2011 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2013 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 9 fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability described follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract level 3 unobservable inputs company use level 3 inputs recurring fair value measurements level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities fs32 tables show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2013 december 31 2012 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2013 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company material longlived assets measured fair value nonrecurring basis report 2013 2012 investments advances company material investments advances measured fair value nonrecurring basis report 2013 2012 assets liabilities required measured fair value company holds cash equivalents bank time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 16245 20939 december 31 2013 december 31 2012 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values 8 708 december 31 2013 december 31 2012 respectively fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2013 assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis fs33 cash equivalents” include investments carryingfair value 1210 1454 december 31 2013 december 31 2012 respectively december 31 2013 investments classified level 1 include restricted funds related tax payments certain upstream abandonment activities reported “deferred charges assets” consolidated balance sheet longterm debt 11960 6086 december 31 2013 december 31 2012 estimated fair values 12267 6770 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 11581 classified level 1 fair value bonds 686 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2013 2012 material note 10 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2013 december 31 2012 december 31 2011 classification consolidated balance sheet consolidated statement income follows consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments fs34 table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2013 december 31 2012 consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions right offset concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers note 11 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include mining operations power energy services worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm company’s executive committee excom committee senior officers includes chief executive officer excom reports board directors chevron corporation operating segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital fs35 exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members excom also individual management responsibilities participate committees purposes acting codm company’s primary country operation united states america country domicile components company’s operations reported international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2013 2012 follows segment sales operating revenues operating segment sales operating revenues including internal transfers years 2013 2012 2011 presented table follows products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale additives fuels lubricant oils transportation trading refined products crude oil natural gas liquids fs36 segment income taxes segment income tax expense years 2013 2012 2011 follows segment information additional information segmentation major equity affiliates contained note 12 information related properties plant equipment segment contained note 13 page fs39 note 12 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period december 31 2013 company’s carrying value investment tco 160 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 7 page fs32 summarized financial information 100 percent tco fs37 petropiar chevron 30 percent interest petropiar joint stock company formed 2008 operate hamaca heavyoil production upgrading project located venezuela’s orinoco belt 25year contract term prior formation petropiar chevron 30 percent interest hamaca project december 31 2013 company’s carrying value investment petropiar approximately 170 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company joined consortium 1997 investments advances totaling 1298 includes longterm loans 1251 yearend 2013 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2013 company’s carrying value investment petroboscan approximately 180 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets 2013 chevron finalized financial agreement petroboscan financing exceed 2 billion occur stages limited drawdown period set expire december 31 2018 loan support specific work program maintain increase production agreedupon level terms designed support cash needs ongoing operations new development well distributions angola lng ltd chevron 36 percent interest angola lng ltd processes liquefies natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2013 fair value chevron’s share cal common stock approximately 2400 information “sales operating revenues” consolidated statement income includes 14635 17356 20164 affiliated companies 2013 2012 2011 respectively “purchased crude oil products” includes 7063 6634 7489 affiliated companies 2013 2012 2011 respectively “accounts notes receivable” consolidated balance sheet includes 1328 1207 due affiliated companies december 31 2013 2012 respectively “accounts payable” includes 466 407 due affiliated companies december 31 2013 2012 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevrons net loans affiliates 1129 1494 957 december 31 2013 2012 2011 respectively fs38 note 13 properties plant equipment1 united states australia nigeria country accounted 10 percent company’s net properties plant equipment ppe 2013 australia 31464 21770 12423 2013 2012 2011 respectively nigeria ppe 18429 17485 15601 2013 2012 2011 respectively net dry hole expense related prior years’ expenditures 89 80 45 2013 2012 2011 respectively includes properties acquired acquisition atlas energy inc 2011 depreciation expense includes accretion expense 627 629 628 2013 2012 2011 respectively primarily mining operations power energy services real estate assets management information systems note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party ten pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit initiated superior court nueva loja lago agrio ecuador may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s fs39 failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first second interim awards international arbitration tribunal discussed next page march 29 2012 matter transferred provincial court national court justice november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court lago agrio approved courtappointed liquidator’s report damages calculated total judgment case 19100 november 13 2013 national court ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 23 2013 chevron appealed decision ecuador constitutional court ecuadors highest court fs40 july 2 2013 provincial court lago agrio issued embargo order ecuador ordering funds paid government ecuador chevron satisfy 96 award issued unrelated action arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law must paid lago agrio plaintiffs award issued tribunal united statesecuador bilateral investment treaty action filed 2006 connection seven breach contract cases texpet filed government ecuador 1991 1993 government ecuador appealed tribunals award federal district court district columbia confirmed tribunals award government ecuador appealed district courts decision chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment may 1 2013 ontario superior court justice held court jurisdiction chevron canada limited purposes action stayed action due absence evidence chevron corporation assets ontario lago agrio plaintiffs appealed decision december 17 2013 court appeals ontario affirmed lower court’s decision jurisdiction set aside stay allowing recognition enforcement action heard ontario superior court justice chevron appealed decision concerning jurisdiction supreme court canada january 16 2014 court appeals ontario granted chevron’s motion stay recognition enforcement proceeding pending decision admissibility supreme court appeal june 27 2012 lago agrio plaintiffs filed action chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment october 15 2012 provincial court lago agrio issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary ingeniero nortberto priu requiring shares companies embargoed requiring third parties withhold 40 percent payments due chevron argentina srl ordering banks withhold 40 percent funds chevron argentina srl bank accounts december 14th 2012 argentinean court rejected motion revoke freeze order modified ordering third parties required withhold funds must report payments court also clarified freeze order relating bank accounts excludes taxes january 30 2013 appellate court upheld freeze order june 4 2013 supreme court argentina revoked freeze order entirety december 12 2013 lago agrio plaintiffs served chevron notice filing enforcement proceeding national court first instance argentina chevron intends vigorously defend proceeding chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador enforcement action chevron expects continue vigorous defense imposition liability ecuadorian courts contest defend enforcement actions chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 tribunal issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal january 25 2012 tribunal converted order interim measures interim award chevron filed renewed application interim measures january 4 2012 republic ecuador opposed chevron’s application requested existing order interim measures vacated january 9 2012 february 16 fs41 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron particular preclude certification republic ecuador would cause judgment enforceable chevron february 27 2012 tribunal issued third interim award confirming jurisdiction hear chevrons arbitration claims february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” tribunal divided merits phase proceeding three phases september 17 2013 tribunal issued first partial award phase one finding settlement agreements republic ecuador texpet applied texpet chevron released texpet chevron claims based collective diffuse rights arising texpets operations former concession area precluded third parties asserting collectivediffuse rights environmental claims relating texpets operations former concession area preclude individual claims personal harm chevron expects application ruling considered tribunal phase two including determination whether claims lago agrio plaintiffs individual collectivediffuse tribunal set phase two begin january 20 2014 hear chevrons denial justice claims january 2 2014 tribunal postponed phase two held procedural hearing january 2021 2014 tribunal set hearing april 2830 2014 address remaining issues relating phase one also set hearing april 20 may 6 2015 address phase two issues tribunal set date phase three damages phase arbitration series us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable march 7 2011 federal district court issued preliminary injunction prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case pending resolution chevron’s civil lawsuit federal district court may 31 2011 federal district court severed claims one eight chevron’s complaint ninth claim declaratory relief imposed discovery stay claims one eight pending trial ninth claim declaratory relief september 19 2011 us court appeals second circuit vacated preliminary injunction stayed trial chevron’s ninth claim declaratory relief set november 14 2011 denied defendants’ mandamus petition recuse judge hearing lawsuit second circuit issued opinion january 26 2012 ordering dismissal chevron’s ninth claim declaratory relief february 16 2012 federal district court lifted stay claims one eight october 18 2012 federal district court set trial date october 15 2013 march 22 2013 chevron settled claims stratus consulting april 12 2013 sworn declarations representatives stratus consulting filed court admitting role plaintiffs attorneys drafting environmental report mining engineer appointed provincial court lago agrio september 26 2013 second circuit denied defendants petition writ mandamus recuse judge hearing case collaterally estop chevron seeking declaration lago agrio judgment obtained fraud unlawful conduct trial commenced october 15 2013 concluded november 22 2013 posttrial briefing concluded decision rendered federal district court date report ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’ submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss fs42 note 15 taxes income taxes 2013 beforetax income us operations including related corporate charges 4672 compared beforetax income 8456 10222 2012 2011 respectively international operations beforetax income 31233 37876 37412 2013 2012 2011 respectively us federal income tax expense reduced 175 165 191 2013 2012 2011 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table company’s effective tax rate decreased 432 percent 2012 399 percent 2013 decrease primarily due lower effective tax rate international upstream operations lower international upstream effective tax rate driven greater portion equity income 2013 2012 equity income included part beforetax income generally recorded net income taxes foreign currency remeasurement impacts company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2013 increased approximately 1600 yearend 2012 increase related increased temporary differences property plant equipment deferred tax assets essentially unchanged periods overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2013 company tax loss carryforwards approximately 3064 tax credit carryforwards approximately 1301 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2014 2029 us foreign tax credit carryforwards 11572 expire 2014 2023 fs43 december 31 2013 2012 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 31300 december 31 2013 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable possible remittance earnings intended reinvested indefinitely end 2013 deferred income taxes recorded undistributed earnings certain international operations indefinite reinvestment earnings planned company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2013 2012 2011 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included increase unrecognized tax benefits december 31 2012 december 31 2013 primarily due additions refund claims filed respect prior years approximately 71 percent 3848 unrecognized tax benefits december 31 2013 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2013 jurisdictions latest years income tax examinations finalized follows united states 2008 nigeria 2000 angola 2001 saudi arabia 2009 kazakhstan 2007 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits fs44 company completed assessment potential impact august 2012 decision us court appeals third circuit disallowed historic rehabilitation tax credits claimed unrelated taxpayer findings assessment result material impact companys financial position results operations cash flows consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2013 accruals 215 anticipated interest penalty obligations included consolidated balance sheet compared accruals 293 yearend 2012 income tax expense benefit associated interest penalties 42 145 64 2013 2012 2011 respectively taxes income note 16 shortterm debt weightedaverage interest rates december 31 2013 2012 009 percent 013 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2013 company interest rate swaps shortterm debt december 31 2013 company 8000 committed credit facilities various major banks expiring december 2016 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2013 december 31 2013 2012 company classified 8000 5900 respectively shortterm debt longterm settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis fs45 note 17 longterm debt total longterm debt excluding capital leases december 31 2013 19960 company’s longterm debt outstanding yearend 2013 2012 follows weightedaverage interest rate december 31 2013 guarantee esop debt chevron automatic statement expires 2015 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt 11960 matures follows 2014 0 2015 0 2016 750 2017 2000 2018 2000 2018 7210 june 2013 6000 chevron corporation bonds issued 83 texaco capital inc 75 bonds due 2043 23 chevron corporation 7327 bonds due 2014 redeemed early january 2013 20 chevron corporation 7327 bonds matured see note 9 beginning page fs32 information concerning fair value company’s longterm debt note 18 new accounting standards income taxes topic 740 presentation unrecognized tax benefit net operating loss carryforward similar tax loss tax credit carryforward exists asu 201311 july 2013 fasb issued asu 201311 became effective company january 1 2014 standard provides liability related unrecognized tax benefit offset deferred tax asset net operating loss carryforward similar tax loss tax credit carryforward settlement required expected event uncertain tax position disallowed adoption standard expected significant effect companys results operations financial position liquidity note 19 accounting suspended exploratory wells company continues capitalize exploratory well cost completion drilling well found sufficient quantity reserves justify completion producing well b entity making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense note entity required complete exploratory well producing well accounting standards provide number indicators assist entity demonstrating sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2013 represents property sales fs46 following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 2604 exploratory well costs capitalized one year december 31 2013 1733 22 projects related projects drilling activities way firmly planned near future 871 balance related 29 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 871 referenced following activities associated assessing reserves projects’ economic viability 382 six projects undergoing frontend engineering design final investment decision expected within three years b 47 two projects development concept review government c 384 nine projects development alternatives review 58 twelve projects miscellaneous activities projects smaller amounts suspended progress made 51 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects approximately half decisions expected occur next three years 2604 suspended well costs capitalized period greater one year december 31 2013 represents 191 exploratory wells 51 projects tables contain aging costs well project basis note 20 stock options sharebased compensation expense stock options 2013 2012 2011 292 190 tax 283 184 tax 265 172 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 223 145 tax 177 115 tax 214 139 tax 2013 2012 2011 respectively significant stockbased compensation cost capitalized december 31 2013 december 31 2012 cash received payment option exercises sharebased payment arrangements 2013 2012 2011 553 753 948 respectively actual tax benefits realized tax deductions option exercises 73 101 121 2013 2012 2011 respectively cash paid settle performance units stock appreciation rights 186 123 151 2013 2012 2011 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2013 contractual terms vary three years performance units 10 years stock options stock appreciation rights fs47 unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans unexercised awards began expiring early 2010 continue expire early 2015 fair market values stock options stock appreciation rights granted 2013 2012 2011 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2013 presented total intrinsic value ie difference exercise price market price options exercised 2013 2012 2011 445 580 668 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2013 259 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plans cost expected recognized weightedaverage period 17 years january 1 2013 number ltip performance units outstanding equivalent 2827757 shares 2013 776180 units granted 1007952 units vested cash proceeds distributed recipients 64715 units forfeited december 31 2013 units outstanding 2531270 fair value liability recorded instruments 312 measured using monte carlo simulation method addition outstanding stock appreciation rights awards granted various ltip former unocal programs totaled approximately 29 million equivalent shares december 31 2013 liability 107 recorded awards note 21 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet fs48 funded status company’s pension postretirement benefit plans 2013 2012 follows amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2013 2012 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 5464 9742 end 2013 2012 respectively amounts consisted accumulated benefit obligations us international pension plans 10876 5108 respectively december 31 2013 12108 5167 respectively december 31 2012 fs49 information us international pension plans accumulated benefit obligation excess plan assets december 31 2013 2012 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2013 2012 2011 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2013 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2014 company estimates actuarial losses 209 102 7 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 132 recognized “accumulated comprehensive loss” 2014 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2013 approximately 10 12 years us international pension plans respectively 10 years postretirement benefit plans 2014 company estimates prior service credits costs 9 21 14 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs50 assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2013 company used expected longterm rate return 75 percent us pension plan assets account 71 percent company’s pension plan assets 2012 2011 company used longterm rate return 75 78 percent respectively plan marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds december 31 2013 company used 43 percent discount rate us pension plans 47 percent main us opeb plan discount rates end 2012 2011 36 39 percent 38 40 percent us pension plans main us opeb plans respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2013 main us postretirement medical plan assumed health care costtrend rates start 73 percent 2014 gradually decline 45 percent 2025 beyond measurement december 31 2012 assumed health care costtrend rates started 75 percent 2013 gradually declined 45 percent 2025 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans plan assets investment strategy fair value hierarchy inputs company uses value pension assets divided three levels level 1 fair values assets measured using unadjusted quoted prices assets prices identical assets active markets plans ability access level 2 fair values assets measured based quoted prices similar assets active markets quoted prices identical similar assets inactive markets inputs quoted prices observable asset inputs derived principally corroborated observable market data correlation means fs51 asset contractual term level 2 input observable substantially full term asset fair values level 2 assets generally obtained thirdparty broker quotes independent pricing services exchanges level 3 inputs fair value measurement unobservable assets valuation may performed using financial model estimated inputs entered model fair value measurements company’s pension plans 2013 2012 us equities include investments company’s common stock amount 28 december 31 2013 27 december 31 2012 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 fs52 effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 88 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys benefit plan investment committee established following approved asset allocation ranges equities 4070 percent fixed income cash 2060 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines reviewed regularly equities 4060 percent fixed income cash 2550 percent real estate 515 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset class risk mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2013 company contributed 819 375 us international pension plans respectively 2014 company expects contributions approximately 350 us plan 350 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 215 2014 compared 205 paid 2013 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop described section follows total company matching contributions employee accounts within esip 303 286 263 2013 2012 2011 respectively cost reduced value shares released lesop totaling 140 43 38 2013 2012 2011 respectively remaining amounts totaling 163 243 fs53 225 2013 2012 2011 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip debt associated lesop retired 2013 remaining unallocated shares distributed esip participants year company reported compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total expenses credits lesop 5 1 2013 2012 2011 respectively net expense credit respective years composed compensation expenses credits 4 2 5 charges interest expense lesop debt 1 3 4 dividends paid lesop shares 38 18 used 2013 2012 2011 respectively service lesop debt company also contributed 7 2 2013 2012 respectively satisfy lesop debt service company contributions required 2011 dividends received lesop sufficient satisfy lesop debt service shares held lesop released allocated accounts esip participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2013 2012 follows benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2013 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2013 2012 trust assets 40 48 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 871 898 1217 2013 2012 2011 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 20 beginning page fs47 note 22 equity retained earnings december 31 2013 2012 included approximately 11395 10119 respectively company’s share undistributed earnings equity affiliates december 31 2013 143 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron ltip addition approximately 204000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 23 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs43 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return discussed page fs45 chevron completed assessment potential impact august 2012 decision us court appeals third circuit disallowed historic rehabilitation tax credits claimed unrelated taxpayer findings assessment result fs54 material impact companys financial position results operations cash flows guarantees company’s guarantee 524 associated certain payments terminal use agreement entered equity affiliate approximate 14year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2014 4200 2015 4500 2016 3200 2017 2600 2018 2200 2019 6900 portion commitments may ultimately shared project partners total payments agreements approximately 3600 2013 3600 2012 6600 2011 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2013 1456 included balance remediation activities approximately 174 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2013 179 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2013 environmental reserves balance 1277 834 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 443 associated various sites international downstream 79 upstream 313 businesses 51 liabilities sites whether operating closed divested primarily associated company’s plans activities fs55 remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2013 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 24 discussion company’s asset retirement obligations contingencies april 26 2010 california appeals court issued ruling related adequacy environmental impact report eir supporting issuance certain permits city richmond california replace upgrade certain facilities chevron’s refinery richmond settlement discussions plaintiffs case ended late fourth quarter 2010 march 3 2011 trial court entered final judgment peremptory writ ordering city set aside project eir conditional use permits enjoining chevron work may 23 2011 company filed application city planning department conditional use permit revised project complete construction hydrogen plant certain sulfur removal facilities related infrastructure june 10 2011 city published notice preparation revised eir project revised recirculated eir intended comply appeals court decision management believes outcomes associated project uncertain due uncertainty company’s future course action potential outcomes action combination actions management believe estimate financial effects made time chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 24 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2013 2012 2011 table amounts associated revisions estimated cash flows reflect increasing cost estimates abandon wells equipment facilities longterm portion 14298 balance end 2013 13476 fs56 note 25 financial information earnings 2013 included aftertax gains approximately 500 relating sale nonstrategic properties amount approximately 300 200 related downstream upstream assets respectively earnings 2012 included aftertax gains approximately 2800 relating sale nonstrategic properties amount approximately 2200 600 related upstream downstream assets respectively financial information follows includes 244 202 27 2013 2012 2011 respectively company’s share equity affiliates’ foreign currency effects excess replacement cost carrying value inventories lastin firstout lifo method used 9150 9292 december 31 2013 2012 respectively replacement cost generally based average acquisition costs year lifo profits charges 14 121 193 included earnings years 2013 2012 2011 respectively company 4639 goodwill consolidated balance sheet related 2005 acquisition unocal 2011 acquisition atlas energy inc company tested goodwill impairment 2013 concluded impairment necessary note 26 assets held sale december 31 2013 company classified 580 net properties plant equipment “assets held sale” consolidated balance sheet assets associated upstream operations anticipated sold 2014 revenues earnings contributions assets 2013 material note 27 earnings per share basic earnings per share eps based upon “net income attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 20 “stock options sharebased compensation” beginning page fs47 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings fs57 fiveyear financial summary unaudited fs58 accordance fasb sec disclosure reporting requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information table costs incurred exploration property acquisitions development1 fs59 company’s estimated net provedreserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally angola chad democratic republic congo nigeria republic congo asia geographic area includes activities principally azerbaijan bangladesh china indonesia kazakhstan myanmar partitioned zone kuwait saudi arabia philippines thailand europe geographic area includes activities primarily denmark netherlands norway united kingdom americas geographic region includes activities primarily argentina brazil canada colombia trinidad tobago amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies amounts composed company’s equity interests principally venezuela angola refer note 12 beginning page fs37 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs60 fs61 company’s results operations oil gas producing activities years 2013 2012 2011 shown following table net income exploration production activities reported page fs36 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts fs36 table iii results operations oil gas producing activities 1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page fs56 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses fs62 table iii results operations oil gas producing activities 1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page fs56 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs 1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel fs63 table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager corporate reserves corporate department reports directly vice chairman responsible company’s worldwide exploration production activities manager corporate reserves 30 years’ experience working oil gas industry master science petroleum engineering degree stanford university experience includes fs64 15 years managing oil gas reserves processes chairman society petroleum engineers oil gas reserves committee served united nations expert group resources classification past member joint committee reserves evaluator training california conservation committee active member society petroleum evaluation engineers serves society petroleum engineers oil gas reserves committee rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates reserves activities managed two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance corporate reserves manual technologies used establishing proved reserves additions 2013 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserve quantities end 2013 proved undeveloped reserves totaled 51 billion barrels oilequivalent boe decrease 56 million boe yearend 2012 decrease due transfer 461 million boe proved developed partially offset increases 210 boe extensions discoveries 7 million boe purchases 42 million boe improved recovery 146 million boe revisions investment convert proved undeveloped proved developed reserves 2013 investments totaling approximately 174 billion oil gas producing activities 34 billion nonoil gas producing activities expended advance development proved undeveloped reserves australia accounted 96 billion total mainly development construction activities gorgon wheatstone lng projects expenditures 35 billion united states related primarily various development activities gulf mexico midcontinent region asia expenditures year totaled 30 billion primarily related development projects thailand indonesia tco affiliate kazakhstan africa 29 billion expended various offshore development natural gas projects nigeria angola proved undeveloped reserves five years reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels fs65 yearend 2013 company held approximately 16 billion boe proved undeveloped reserves remained undeveloped five years reserves held consolidated affiliated companies majority reserves locations company proven track record developing major projects africa majority approximately 300 million boe proved undeveloped reserves remained undeveloped five years related deepwater natural gas developments nigeria major nigerian deepwater development projects include agbami started production 2008 ongoing development activities maintain full utilization infrastructure capacity usan development started production 2012 also nigeria various fields infrastructure associated escravos gas projects currently development asia less 200 million boe remain classified proved undeveloped five years majority relate ongoing development activities pattani field thailand azerichiraggunashli fields azerbaijan affiliates account 11 billion barrels proved undeveloped reserves remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion venezuela development drilling continues hamaca optimize utilization upgrader capacity annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2013 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 44 percent 46 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities december 31 2013 proved reserves company 112 billion boe approximately 18 percent total reserves located united states aside tco affiliates tengiz field kazakhstan single property accounted 5 percent company’s total oilequivalent proved reserves 18 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted 44 percent company’s total oilequivalent proved reserves properties geographically dispersed located united states canada south america africa asia australia united states total proved reserves yearend 2013 20 billion boe california properties accounted 30 percent us reserves classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods company’s heavy oil fields california employ continuous steamflooding process gulf mexico region contains 26 percent us reserves production operations mostly offshore us areas represent remaining 44 percent us reserves production crude oil fields utilize enhanced recovery methods including waterflooding co2 injection three years ending december 31 2013 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved reserves crude oil condensate natural gas liquids synthetic oil changes thereto years 2011 2012 2013 shown table page fs67 company’s estimated net proved reserves natural gas shown page fs68 fs66 net proved reserves developed undeveloped crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 141 121 13 south america 102 100 2013 2012 2011 respectively reserves associated canada ending reserve balances africa 37 41 38 south america 117 123 119 2013 2012 2011 respectively included yearend reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 20 percent 20 percent 22 percent consolidated companies 2013 2012 2011 respectively noteworthy amounts categories liquids proved reserve changes 2011 2013 discussed revisions 2011 net revisions increased reserves 235 million barrels consolidated companies improved reservoir performance accounted majority 63 million barrel increase united states africa improved field performance drove 60 million barrel increase asia increases improved reservoir performance partially offset effects higher prices entitlement volumes synthetic oil reserves canada increased 32 million barrels primarily due geotechnical revisions affiliated companies improved facility reservoir performance partially offset price effect entitlement volumes tco 2012 net revisions increased reserves 390 million barrels improved field performance drilling associated gulf mexico projects accounted majority 104 million barrel increase united states asia drilling results across numerous assets drove 97 million barrel increase improved field performance various nigeria angola producing assets primarily responsible 66 million barrel increase africa improved plant efficiency tco affiliate responsible large portion 59 million barrel increase 2013 net revisions increased reserves 354 million barrels improved field performance various nigeria angola producing assets primarily responsible 94 million barrel increase africa asia drilling performance across numerous assets resulted 84 million barrel increase improved field performance drilling associated gulf mexico projects drilling midland delaware basins accounted majority 55 million barrel increase united states synthetic oil reserves canada increased 40 million barrels primarily due improved field performance improved recovery 2011 improved recovery increased volumes 58 million barrels reserves africa increased 48 million barrels due primarily secondary recovery performance nigeria 2012 improved recovery increased reserves 77 million barrels primarily due secondary recovery performance africa gulf mexico fields united states fs67 2013 improved recovery increased reserves 57 million barrels due numerous small projects including expansions existing projects united states europe asia africa extensions discoveries 2011 extensions discoveries increased reserves 299 million barrels united states additions related two gulf mexico projects resulted majority 140 million barrel increase australia wheatstone project increased liquid volumes 65 million barrels africa americas increased reserves 34 million 30 million barrels respectively following start new projects areas europe project united kingdom increased reserves 26 million barrels 2012 extensions discoveries increased reserves 218 million barrels americas extensions discoveries increased reserves 101 million barrels primarily due initial booking hebron project canada united states additions several gulf mexico projects drilling activities midcontinent region primarily responsible 77 million barrel increase 2013 extensions discoveries increased reserves 78 million barrels united states extensions discoveries midland delaware basins primarily responsible 55 million barrel increase purchases 2011 purchases increased worldwide liquid volumes 42 million barrels acquisition additional acreage canada increased synthetic oil reserves 40 million barrels net proved reserves natural gas ending reserve balances north america south america 54 49 19 1246 1426 1645 2013 2012 2011 respectively ending reserve balances africa south america 1009 1068 1016 177 174 187 2013 2012 2011 respectively total “as sold” volumes 1704 bcf 1666 bcf 1615 bcf 2013 2012 2011 respectively 2011 2012 conformed 2013 presentation includes reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 20 percent 21 percent 21 percent consolidated companies 2013 2012 2011 respectively fs68 noteworthy amounts categories natural gas provedreserve changes 2011 2013 discussed revisions 2011 net revisions increased reserves 497 bcf consolidated companies improved reservoir performance accounted majority 217 bcf increase united states asia net increase 196 bcf driven development drilling improved field performance thailand partially offset effects higher prices entitlement volumes kazakhstan affiliated companies ongoing reservoir assessment resulted recognition additional reserves related angola lng project tco improved facility reservoir performance offset price effect entitlement volumes 2012 net revisions increased reserves 1855 bcf net increase 1007 bcf asia primarily due development drilling additional compression bangladesh drilling results improved field performance thailand australia updated reservoir data interpretation based additional drilling gorgon project drove 358 bcf increase drilling results activities marcellus shale responsible majority 318 bcf increase united states 2013 net revisions increased reserves 718 bcf net increase 627 bcf asia primarily due development drilling improved field performance bangladesh thailand australia drilling performance drove 229 bcf increase majority net decrease 234 bcf united states due change development plans appalachian region extensions discoveries 2011 extensions discoveries increased reserves 4680 bcf australia wheatstone project accounted 4035 bcf additions africa start new natural gas development project nigeria resulted 290 bcf increase united states development drilling accounted majority 287 bcf increase 2012 extensions discoveries increased reserves 1011 bcf increase 747 bcf australia primarily related positive drilling results gorgon project 2013 extensions discoveries increased reserves 1021 bcf majority appalachian region us purchases 2011 purchases increased reserves 1233 bcf united states acquisitions marcellus shale increased reserves 1230 bcf sales 2011 sales decreased reserves 174 bcf australia wheatstone project unitization equity sales agreements reduced reserves 77 bcf united states sales alaska smaller fields reduced reserves 95 bcf 2012 sales decreased reserves 538 bcf sales portion companys equity interest wheatstone project responsible 439 bcf reserves reduction australia fs69 standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fasb estimated future cash inflows production computed applying 12month average prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations valuation prescribed fasb requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows table vi standardized measure discounted future net cash flows related proved oil gas reserves based 12month average price 2012 conformed 2013 presentation fs70 changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” table vii changes standardized measure discounted future net cash flows proved reserves 2012 conformed 2013 presentation fs71 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts see also note 16 consolidated financial statements beginning page fs45 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 20th day february 2015 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 20th day february 2015 principal executive officers directors sjohn watson john watson chairman board chief executive officer sgeorge l kirkland george l kirkland vice chairman board principal financial officer spatricia e yarrington patricia e yarrington vice president chief financial officer principal accounting officer smatthew j foehr matthew j foehr vice president comptroller slydia beebe lydia beebe attorneyinfact directors alexander b cummings jr alexander b cummings jr linnet f deily linnet f deily robert e denham robert e denham alice p gast alice p gast enrique hernandez jr enrique hernandez jr jon huntsman jr jon huntsman jr charles w moorman charles w moorman kevin w sharer kevin w sharer john g stumpf john g stumpf ronald sugar ronald sugar inge g thulin inge g thulin carl ware carl ware page intentionally left blank financial table contents fs1 managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page fs7 discussion financial results major operating area three years ended december 31 2014 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil canada china colombia democratic republic congo denmark indonesia kazakhstan myanmar nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend mostly profitability upstream business segment biggest factor affecting results operations upstream segment price crude oil price crude oil fallen significantly since midyear 2014 reflecting robust nonopec supply growth led expanding unconventional production united states weakening growth emerging markets decision opec fourth quarter 2014 maintain current production ceiling downturn price crude oil impacted depending upon duration continue significantly impact companys results operations cash flows capital exploratory investment program production outlook lower prices persist extended period time companys response could include reductions operating expenses capital exploratory expenditures additional asset sales company anticipates crude oil prices increase future continued growth demand slowing supply growth bring global markets balance however timing increases unknown companys downstream business crude oil largest cost component refined products refer cautionary statement relevant forwardlooking information page 2 risk factors part item 1a pages 22 24 discussion inherent risks could materially impact companys results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning page fs7 discussions net gains asset sales 2014 asset dispositions restructurings may also occur future periods could result significant gains losses fs2 managements discussion analysis financial condition results operations company closely monitors developments financial credit markets level worldwide economic activity implications company changes prices crude oil natural gas management takes developments account conduct ongoing operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas actions imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control including among things general level inflation commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services recent years chevron oil gas industry generally experienced increase certain costs exceeded general trend inflation many areas world result decline prices crude oil commodities 2014 cost pressures beginning soften capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 99 per barrel fullyear 2014 compared 109 2013 midfebruary 2015 brent price 60 per barrel majority company’s equity crude production priced based brent benchmark geopolitical tensions supply disruptions supported crude prices midyear crude prices since decline signs crude oil oversupply emerged second half year due continued robust nonopec supply growth concern softness global economic recovery material easing geopolitical tensions supply disruptions downward pressure crude pricing magnified opec’s decision november 2014 maintain current production ceiling 30 million barrels per day despite evidence market surplus wti price averaged 93 per barrel fullyear 2014 compared 98 2013 midfebruary 2015 wti price 53 per barrel wti traded discount brent throughout 2014 due high inventories excess crude supply us market fs3 managements discussion analysis financial condition results operations differential crude oil prices exists highquality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated supply heavy crude versus demand function capacity refineries able process lower quality feedstock light products motor gasoline jet fuel aviation gasoline diesel fuel peaking early second quarter 2014 differential eased north america refinery crude runs remained record levels outside north america easing geopolitical tensions continued expansion supply light sweet crudes pressured light sweet crude prices relative heavier sour crudes chevron produces shares production heavy crude oil california indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs11 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets fluctuations price natural gas united states closely associated customer demand relative volumes produced stored north america united states prices henry hub averaged 428 per thousand cubic feet mcf 2014 compared 370 2013 midfebruary 2015 henry hub spot price 273 per mcf outside united states price changes natural gas depend wide range supply demand regulatory commercial factors locations chevron investing longterm projects install infrastructure produce liquefy natural gas transport tanker markets companys contract prices liquefied natural gas lng typically linked crude oil prices chevrons international natural gas realizations averaged 578 per mcf 2014 compared 591 per mcf 2013 see page fs11 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2014 averaged 2571 million barrels per day onefifth company’s net oilequivalent production 2014 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait opec quotas effect company’s net crude oil production 2014 2013 november 2014 meeting members opec supported maintaining current production quota 30 million barrels per day effect since december 2008 company estimates oilequivalent production 2015 flat 3 percent growth compared 2014 estimate subject many factors uncertainties including duration low price environment began secondhalf 2014 quotas may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fs4 managements discussion analysis financial condition results operations fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states net proved reserves consolidated companies affiliated companies totaled 111 billion barrels oil equivalent yearend 2014 decrease 1 percent yearend 2013 reserve replacement ratio 2014 89 percent refer table v beginning page fs65 tabulation company’s proved net oil gas reserves geographic area beginning 2012 yearend 2012 2014 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2014 november 7 2011 drilling development well deepwater frade field 75 miles offshore brazil unanticipated pressure spike caused oil migrate well bore series fissures sea floor emitting approximately 2400 barrels oil source seep substantially contained within four days well plugged abandoned march 14 2012 company identified small second seep different part field evidence coastal wildlife impacts related either seeps emerged reported company’s previously filed periodic reports resolved civil claims relating incidents brought brazilian federal district prosecutor also reported previously federal district prosecutor also filed criminal charges chevron eleven chevron employees february 19 2013 trial court dismissed criminal matter appeal october 9 2013 appellate court reinstated two ten allegations specifically charges alleging environmental damage failure provide timely notification authorities february 27 2014 chevron filed motion reconsideration motion dismiss pending proceedings reinstated allegations company’s ultimate exposure related incident currently determinable refer “results operations” section pages fs7 fs9 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast asia southern africa chevron operates significant ownership interests refineries areas refer “results operations” section pages fs7 fs9 additional discussion company’s downstream operations consists mining activities power energy services worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies fs5 managements discussion analysis financial condition results operations operating developments key operating developments events 2014 early 2015 included following upstream argentina signed additional agreements continue development loma campana project vaca muerta shale begin exploration narambuena area neuquén basin australia announced january 2015 additional binding sales agreement delivery lng gorgon project fiveyear period starting 2017 time agreement 75 percent chevrons equity lng offtake project committed binding sales agreements customers asia azerbaijan achieved first production chirag oil project caspian sea bangladesh announced first gas bibiyana expansion project canada completed sale 30 percent interest duvernay shale play 15 billion chadcameroon completed sale company’s nonoperated interest producing concession chad related export pipeline interests chad cameroon approximately 13 billion kazakhstanrussia achieved 230000barrelperday increase capacity caspian pipeline consortium pipeline mauritania early 2015 company reached agreement acquire 30 percent nonoperated working interest three contract areas offshore mauritania pending government approval myanmar announced acquisition offshore acreage new zealand announced acquisition three offshore blocks nigeria achieved initial production product escravos gastoliquids facility united states announced initial crude oil natural gas production jackst malo tubular bells projects deepwater gulf mexico made significant crude oil discoveries guadalupe anchor prospects deepwater gulf mexico early 2015 announced joint venture explore appraise 24 jointlyheld offshore leases northwest portion keathley canyon deepwater gulf mexico joint venture includes tiber gila discoveries gibson prospect company acquired 36 percent working interest gila leases 31 percent working interest tiber leases previously held working interest gibson reached final investment decision stampede project deepwater gulf mexico completed sale natural gas liquids pipeline assets texas southeastern new mexico 800 million drilled 550 wells 2014 midland delaware basins west texas southeast new mexico downstream france completed expansion project additives plant gonfreville france singapore completed expansion project additives plant singapore united states commenced commercial production new premium lubricants base oil facility pascagoula mississippi companys 50 percentowned chevron phillips chemical company llc cpchem achieved startup world’s largest onpurpose 1hexene plant capacity 250000 metric tons per year cedar bayou complex baytown texas progressed construction cpchems us gulf coast petrochemicals project common stock dividends quarterly common stock dividend increased 70 percent april 2014 107 per common share making 2014 27th consecutive year company increased annual dividend payout common stock repurchase program company purchased 50 billion common stock 2014 share repurchase program given change market conditions company suspending share repurchase program 2015 fs6 managements discussion analysis financial condition results operations results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 12 beginning page fs37 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream us upstream earnings 33 billion 2014 decreased 717 million 2013 primarily due lower crude oil prices 950 million higher depreciation expenses 440 million higher operating expenses 210 million also contributed decline partially offsetting decrease higher gains asset sales 700 million current period compared 60 million 2013 higher natural gas realizations 150 million higher crude oil production 100 million us upstream earnings 40 billion 2013 decreased 13 billion 2012 primarily due higher operating depreciation exploration expenses 420 million 350 million 190 million respectively lower crude oil production 170 million higher natural gas realizations approximately 200 million mostly offset lower crude oil realizations 170 million company’s average realization us crude oil natural gas liquids 2014 8413 per barrel compared 9346 2013 9521 2012 average natural gas realization 390 per thousand cubic feet 2014 compared 337 264 2013 2012 respectively net oilequivalent production 2014 averaged 664000 barrels per day 1 percent 2013 2012 2014 2013 production increases permian basin texas new mexico marcellus shale western pennsylvania partially offset normal field declines 2013 2012 new production marcellus shale western pennsylvania delaware basin new mexico along absence weatherrelated downtime gulf mexico largely offset normal field declines net liquids component oilequivalent production 2014 averaged 456000 barrels per day 2 percent 2013 largely unchanged 2012 net natural gas production averaged 13 billion cubic feet per day 2014 largely unchanged 2013 4 percent 2012 refer “selected operating data” table page fs11 threeyear comparative production volumes united states fs7 managements discussion analysis financial condition results operations international upstream international upstream earnings 136 billion 2014 compared 168 billion 2013 decrease periods primarily due lower crude oil prices sales volumes 20 billion 400 million respectively also contributing decrease higher depreciation expenses 10 billion mainly related impairments asset writeoffs higher operating tax expenses 340 million 310 million respectively partially offsetting items gains asset sales 11 billion 2014 compared 140 million 2013 foreign currency effects increased earnings 597 million 2014 compared increase 559 million year earlier international upstream earnings 168 billion 2013 compared 185 billion 2012 decrease mainly due absence 2012 gains approximately 14 billion asset exchange australia 600 million sale equity interest wheatstone project lower crude oil prices 500 million higher operating expense 400 million partially offsetting effects lower income tax expenses 430 million foreign currency effects increased earnings 559 million 2013 compared decrease 275 million year earlier company’s average realization international crude oil natural gas liquids 2014 9042 per barrel compared 10026 2013 10188 2012 average natural gas realization 578 per thousand cubic feet 2014 compared 591 599 2013 2012 respectively international net oilequivalent production 191 million barrels per day 2014 decrease 2 percent 2013 2012 production increases due project rampups nigeria argentina brazil 2014 offset normal field declines production entitlement effects several locations effect asset sales decline 2013 2012 result project rampups nigeria angola 2013 offset normal field declines net liquids component international oilequivalent production 125 million barrels per day 2014 decrease approximately 2 percent 2013 decrease approximately 4 percent 2012 international net natural gas production 39 billion cubic feet per day 2014 1 percent 2013 1 percent 2012 refer “selected operating data” table page fs11 threeyear comparative international production volumes us downstream us downstream operations earned 26 billion 2014 compared 787 million 2013 higher margins refined product sales increased earnings 830 million gains asset sales 960 million 2014 compared 250 million year earlier higher earnings 50 percentowned cpchem 160 million lower operating expenses 80 million also contributed earnings increase us downstream operations earned 787 million 2013 compared 20 billion 2012 decrease mainly due lower margins refined product sales 860 million higher operating expenses 600 million reflecting repair maintenance activities companys refineries decrease partially offset higher earnings 150 million 50 percentowned cpchem refined product sales 121 million barrels per day 2014 increased 2 percent mainly reflecting higher gas oil sales volumes refined products 118 million barrels per day 2013 decrease 2 percent 2012 mainly reflecting lower gas oil gasoline sales us branded gasoline sales 516000 barrels per day 2014 essentially unchanged 2013 2012 refer “selected operating data” table page fs11 threeyear comparison sales volumes gasoline refined products refinery input volumes fs8 managements discussion analysis financial condition results operations international downstream international downstream earned 17 billion 2014 compared 15 billion 2013 increase mainly due favorable change effects derivative instruments 640 million increase partially offset economic buyout legacy pension obligation 160 million current period lower margins refined product sales 130 million higher tax expenses 110 million foreign currency effects decreased earnings 112 million 2014 compared decrease 76 million year earlier international downstream earned 15 billion 2013 compared 23 billion 2012 earnings decreased due lower gains asset sales 540 million higher income tax expenses 110 million foreign currency effects decreased earnings 76 million 2013 compared decrease 173 million year earlier total refined product sales 150 million barrels per day 2014 declined 2 percent 2013 mainly reflecting lower gas oil sales 153 million barrels per day 2013 declined 2 percent 2012 mainly reflecting lower fuel oil gasoline sales refer “selected operating data” table page fs11 threeyear comparison sales volumes gasoline refined products refinery input volumes consists mining activities power energy services worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2014 increased 365 million 2013 mainly due environmental reserves additions asset impairments additional asset retirement obligations mining assets well higher corporate tax items increases partially offset absence 2013 impairments powerrelated affiliates lower corporate charges net charges 2013 decreased 285 million 2012 mainly due lower corporate tax items corporate charges consolidated statement income comparative amounts certain income statement categories shown sales operating revenues decreased 2014 primarily due lower crude oil volumes lower refined product crude oil prices decrease 2013 2012 mainly due lower refined product prices lower crude oil volumes prices income equity affiliates decreased 2014 2013 mainly due lower upstreamrelated earnings tengizchevroil kazakhstan petropiar petroboscan venezuela angola lng partially offsetting effects higher downstreamrelated earnings gs caltex south korea higher earnings cpchem absence 2013 impairments powerrelated affiliates income equity affiliates increased 2013 2012 mainly due higher upstreamrelated earnings tengizchevroil kazakhstan petropiar venezuela higher earnings cpchem partially offset 2013 impairments powerrelated affiliates refer note 13 beginning page fs40 discussion chevron’s investments affiliated companies fs9 managements discussion analysis financial condition results operations income 44 billion 2014 included net gains asset sales 36 billion beforetax income 2013 2012 included net gains asset sales 710 million 42 billion beforetax respectively interest income approximately 145 million 2014 136 million 2013 166 million 2012 foreign currency effects increased income 277 million 2014 increasing income 103 million 2013 decreasing income 207 million 2012 crude oil product purchases 1197 billion 2014 mainly due lower crude oil refined products prices along lower crude oil volumes crude oil product purchases 2013 decreased 61 billion prior year mainly due lower prices refined products lower volumes crude oil partially offset higher refined product volumes operating selling general administrative expenses increased 642 million 2014 2013 increase included higher employee compensation benefit costs 360 million primarily related buyout legacy pension obligation also contributing increase higher transportation costs 350 million primarily reflecting economic buyout longterm contractual obligation higher environmental expenses related mining asset 300 million partially offsetting increase lower fuel expenses 360 million operating selling general administrative expenses increased 18 billion 2013 2012 mainly due higher employee compensation benefits costs 720 million construction maintenance expenses 590 million professional services costs 500 million exploration expenses 2014 increased 2013 mainly due higher charges well writeoffs partially offset lower geological geophysical expenses exploration expenses 2013 increased 2012 mainly due higher charges well writeoffs depreciation depletion amortization expenses increased 2014 2013 mainly due higher depreciation rates impairments certain oil gas producing fields impairment mining asset increase 2013 2012 mainly due higher depreciation rates certain oil gas producing fields higher upstream impairments higher accretion expense partially offset lower production levels taxes income decreased 2014 2013 mainly due decrease duty expense south africa along lower consumer excise taxes thailand reflecting lower sales volumes locations taxes income increased 2013 2012 primarily due consolidation 64 percentowned star petroleum refining company beginning june 2012 higher consumer excise taxes united states effective income tax rates 38 percent 2014 40 percent 2013 43 percent 2012 decrease effective tax rate 2014 2013 primarily resulted impact changes jurisdictional mix equity earnings fs10 managements discussion analysis financial condition results operations tax effects related 2014 sale interests chad cameroon partially offset onetime ongoing tax charges rate decreased 2013 2012 primarily due lower effective tax rate international upstream operations lower international upstream effective tax rate driven greater portion equity income 2013 2012 equity income included part beforetax income generally recorded net income taxes foreign currency remeasurement impacts selected operating data12 fs11 managements discussion analysis financial condition results operations liquidity capital resources cash equivalents time deposits marketable securities total balances 132 billion 165 billion december 31 2014 2013 respectively cash provided operating activities 2014 315 billion compared 350 billion 2013 388 billion 2012 cash provided operating activities net contributions employee pension plans approximately 04 billion 12 billion 12 billion 2014 2013 2012 respectively cash provided investing activities included proceeds deposits related asset sales 57 billion 2014 11 billion 2013 28 billion 2012 restricted cash 15 billion 12 billion december 31 2014 2013 respectively held cash shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet amounts generally associated tax payments upstream abandonment activities funds held escrow asset acquisitions capital investment projects dividends paid common stockholders 79 billion 2014 75 billion 2013 68 billion 2012 april 2014 company increased quarterly dividend 7 percent 107 per common share debt capital lease obligations total debt capital lease obligations 278 billion december 31 2014 204 billion yearend 2013 74 billion increase total debt capital lease obligations 2014 primarily due funding company’s capital investment program included several large projects construction phase company completed 4 billion bond issuance november 2014 timed part take advantage historically low interest rates company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 118 billion december 31 2014 compared 84 billion yearend 2013 amounts 80 billion reclassified longterm end periods yearend 2014 settlement obligations expected require use working capital 2015 company intent ability evidenced committed credit facilities refinance longterm basis chevron automatic shelf registration statement expires november 2015 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s pl moody’s ratings denote highquality investmentgrade securities fs12 managements discussion analysis financial condition results operations company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company also modify capital spending plans provide flexibility continue paying common stock dividend intent maintain company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 18 consolidated financial statements shortterm debt page fs49 common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits 2014 company purchased 415 million common shares 50 billion inception program 2014 company purchased 1809 million shares 200 billion given change market conditions company suspending share repurchase program 2015 capital exploratory expenditures capital exploratory expenditures business segment 2014 2013 2012 follows total expenditures 2014 403 billion including 35 billion company’s share equityaffiliate expenditures require cash outlays company 2013 2012 expenditures 419 billion 342 billion respectively including company’s share affiliates’ expenditures 27 billion 21 billion respectively increase expenditures 2013 2012 included approximately 4 billion major resource acquisitions argentina australia permian basin kurdistan region iraq along additional acreage duvernay shale interests kitimat lng project addition work progressed number major capital projects particularly two australian lng projects two deepwater gulf mexico projects 403 billion expenditures 2014 92 percent 371 billion related upstream activities approximately 90 percent expended upstream operations 2013 2012 international upstream accounted 76 percent worldwide upstream investment 2014 78 percent 2013 72 percent 2012 company estimates 2015 capital exploratory expenditures 350 billion including 40 billion spending affiliates planned reduction compared 2014 expenditures large part response current market conditions approximately 90 percent total 316 billion budgeted exploration production activities approximately 234 billion 74 percent amount projects outside united states spending 2015 primarily focused major development projects angola argentina australia canada kazakhstan nigeria republic congo russia united kingdom us also included funding enhancing recovery mitigating natural field declines currentlyproducing assets development shale tight resources focused exploration appraisal activities company continue monitor crude oil market conditions modify spending plans needed worldwide downstream spending 2015 estimated 28 billion 20 billion projects united states half investments expected funded cpchem petrochemicals projects united states additional capital outlays include projects us international refineries investments technology companies corporate businesses 2015 budgeted 06 billion noncontrolling interests company noncontrolling interests 12 billion december 31 2014 compared 13 billion yearend 2013 distributions noncontrolling interests totaled 47 million 99 million 2014 2013 respectively pension obligations information related pension plan contributions included page fs56 note 22 consolidated financial statements heading “cash contributions benefit payments” fs13 managements discussion analysis financial condition results operations financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2014 book value inventory lower replacement costs based average acquisition costs year approximately 81 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2014 lower 2013 2012 due lower income debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage companys debt ratio 2014 higher 2013 2012 company took debt finance ongoing investment program partially offset higher stockholders equity balance offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2015 36 billion 2016 30 billion 2017 23 billion 2018 21 billion 2019 16 billion 2020 45 billion portion commitments may ultimately shared project partners total payments agreements approximately 37 billion 2014 36 billion 2013 36 billion 2012 following table summarizes company’s significant contractual obligations excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 22 beginning page fs52 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 80 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20162017 period include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices fs14 managements discussion analysis financial condition results operations direct guarantees company’s guarantee 485 million associated certain payments terminal use agreement entered equity affiliate approximate 13year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications information related indemnifications included page fs57 note 23 consolidated financial statements heading “indemnifications” financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2014 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2014 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies reviewed audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2014 material companys results operations company uses monte carlo simulation method 95 percent confidence level valueatrisk var model estimate maximum potential loss fair value effect adverse changes market conditions derivative commodity instruments held issued oneday holding period used assumption marketrisk positions liquidated hedged within one day based inputs var companys primary risk exposures area derivative commodity instruments december 31 2014 2013 material companys cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2014 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2014 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” note 13 consolidated financial statements page fs41 discussion management believes agreements negotiated terms consistent would negotiated unrelated party fs15 managements discussion analysis financial condition results operations litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page fs42 note 15 consolidated financial statements heading “mtbe” ecuador information related ecuador matters included note 15 consolidated financial statements heading “ecuador” beginning page fs42 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 151 billion asset retirement obligations yearend 2014 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2014 environmental expenditures refer note 23 pages fs57 fs59 additional discussion environmental remediation provisions yearend reserves refer also note 24 page fs59 additional discussion companys asset retirement obligations suspended wells information related suspended wells included note 20 consolidated financial statements accounting suspended exploratory wells beginning page fs49 income taxes information related income tax contingencies included pages fs45 fs48 note 16 page fs57 note 22 consolidated financial statements heading “income taxes” contingencies information related contingencies included page fs58 note 23 consolidated financial statements heading “other contingencies” environmental matters virtually aspects businesses company engages subject various international federal state local environmental health safety laws regulations marketbased programs regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells regulations intended address concerns greenhouse gas emissions global climate change also continue evolve include international multinational mechanisms kyoto protocol european unions emissions trading system national us environmental protection agencys emission standards renewable transportation fuel content requirements domestic marketbased programs effect australia new zealand state regional californias global warming solutions act levels regulations intended address hydraulic fracturing also continue evolve national state levels costs complying laws regulations pertaining company operations products embedded normal costs business possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect companys liquidity financial position fs16 managements discussion analysis financial condition results operations accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2014 approximately 26 billion consolidated companies included expenditures approximately 09 billion environmental capital expenditures 17 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2015 total worldwide environmental capital expenditures estimated 09 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2014 chevrons uop depreciation depletion amortization dda oil gas properties 130 billion proved developed reserves beginning 2014 48 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2014 would increased approximately 690 million fs17 managements discussion analysis financial condition results operations 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review assessing whether property impaired fair value property must determined frequently discounted cash flow methodology best estimate fair value proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page fs65 changes proved reserve estimates three years ending december 31 2014 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs71 estimates proved reserve values three years ended december 31 2014 oil gas reserves commentary read conjunction properties plant equipment section note 1 consolidated financial statements beginning page fs28 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 9 beginning page fs34 section properties plant equipment note 1 summary significant accounting policies beginning page fs28 company routinely performs impairment reviews triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision companys crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis material individual impairments ppe investments recorded three years ending december 31 2014 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2014 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes fs18 managements discussion analysis financial condition results operations assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 24 page fs59 additional discussions asset retirement obligations pension postretirement benefit plans note 22 beginning page fs52 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page fs54 note 22 relevant headings actual rates may vary significantly estimates unanticipated changes worlds financial markets 2014 company used expected longterm rate return 75 percent discount rate 43 percent us pension plans 10 years ending december 31 2014 actual asset returns averaged 60 percent plan actual return 2014 75 percent additionally exception two years within 10year period actual asset returns plan equaled exceeded 75 percent year total pension expense 2014 12 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 39 percent companywide pension expense would reduced total pension plan expense 2014 approximately 98 million 1 percent increase discount rate plan would reduced pension expense 2014 approximately 229 million aggregate funded status recognized december 31 2014 net liability approximately 47 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2014 company used discount rate 37 percent measure obligations us pension plans indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 63 percent companywide pension obligation would reduced plan obligation approximately 403 million would decreased plan’s underfunded status approximately 16 billion 12 billion company’s opeb plans expense 2014 219 million total liability reflected unfunded status plans end 2014 37 billion main us opeb plan company used 47 percent discount rate measure expense 2014 41 percent discount rate measure benefit obligations december 31 2014 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2014 opeb expense opeb liabilities end 2014 information sensitivity health care costtrend rate refer fs54 note 22 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page fs53 note 22 description method used amortize 72 billion beforetax actuarial losses recorded company december 31 2014 estimate costs recognized expense 2015 addition information related company contributions included page fs56 note 22 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling fs19 managements discussion analysis financial condition results operations general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 23 beginning page fs57 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2014 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 19 page fs49 notes consolidated financial statements information regarding new accounting standards quarterly results stock market data unaudited fs20 fs21 fs22 consolidated statement income millions dollars except pershare amounts fs23 consolidated statement comprehensive income millions dollars fs24 consolidated balance sheet millions dollars except pershare amount fs25 consolidated statement cash flows millions dollars fs26 consolidated statement equity shares thousands amounts millions dollars fs27 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized fs28 notes consolidated financial statements millions dollars except pershare amounts costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 20 beginning page fs49 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 9 beginning page fs34 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 24 page fs59 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual based part probability future remediation commitment required crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 24 page fs59 discussion company’s aros fs29 notes consolidated financial statements millions dollars except pershare amounts federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs23 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ending december 31 2014 reflected table amounts net tax refer note 22 employee benefit plans reclassified components totaling 783 included employee benefit costs year ending december 31 2014 related income taxes period totaling 245 reflected income tax expense consolidated statement income reclassified amounts insignificant fs30 notes consolidated financial statements millions dollars except pershare amounts note 3 noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” activity equity attributable noncontrolling interests 2014 2013 2012 follows note 4 information relating consolidated statement cash flows “net increase decrease operating working capital” includes reductions 58 79 98 excess income tax benefits associated stock options exercised 2014 2013 2012 respectively amounts offset equal amount “net purchases treasury shares” includes changes postretirement benefits obligations longterm liabilities “net purchases treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 5006 5004 2014 2013 2012 respectively 2014 2013 2012 company purchased 415 million 416 million 466 million common shares 5000 ongoing share repurchase program respectively 2014 2013 2012 “net purchases sales shortterm investments” generally consisted restricted cash associated upstream abandonment activities funds held escrow taxdeferred exchanges asset acquisitions tax payments invested cash shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet fs31 notes consolidated financial statements millions dollars except pershare amounts consolidated statement cash flows excludes changes consolidated balance sheet affect cash 2012 period excludes effects 800 proceeds received future periods sale equity interest wheatstone project 164 received december 31 2014 capital expenditures 2012 period excludes 1850 increase properties plant equipment related upstream asset exchange australia refer also note 24 page fs59 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2014 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 2310 2014 1661 2013 4569 2012 note 5 equity retained earnings december 31 2014 2013 included approximately 14512 11395 respectively company’s share undistributed earnings equity affiliates december 31 2014 133 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron ltip addition approximately 174510 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 6 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets follows fs32 notes consolidated financial statements millions dollars except pershare amounts rental expenses incurred operating leases 2014 2013 2012 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2014 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 7 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows fs33 notes consolidated financial statements millions dollars except pershare amounts note 8 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 13 beginning page fs40 discussion tco operations summarized financial information 100 percent tco presented table note 9 fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract level 3 unobservable inputs company use level 3 inputs recurring fair value measurements level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2014 december 31 2013 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2014 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company reported impairments certain oil gas properties mining asset 2014 company material longlived assets measured fair value nonrecurring basis report 2013 investments advances company material investments advances measured fair value nonrecurring basis report 2014 2013 fs34 notes consolidated financial statements millions dollars except pershare amounts assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents bank time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 12785 16245 december 31 2014 december 31 2013 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values 8 december 31 2014 december 31 2013 fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2014 cash equivalents” include investments carryingfair value 1474 1210 december 31 2014 december 31 2013 respectively december 31 2014 investments classified level 1 include restricted funds related upstream abandonment activities funds held escrow taxdeferred exchanges asset acquisitions tax payments reported “deferred charges assets” consolidated balance sheet longterm debt 15960 11960 december 31 2014 december 31 2013 estimated fair values 16450 12267 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 15727 classified level 1 fair value bonds 723 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2014 2013 material note 10 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities fs35 notes consolidated financial statements millions dollars except pershare amounts company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2014 december 31 2013 december 31 2012 classification consolidated balance sheet consolidated statement income follows consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2014 december 31 2013 consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions right offset concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers fs36 notes consolidated financial statements millions dollars except pershare amounts note 11 earnings per share basic earnings per share eps based upon “net income attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 21 “stock options sharebased compensation” beginning page fs50 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings note 12 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include mining activities power energy services worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported international” outside united states fs37 notes consolidated financial statements millions dollars except pershare amounts segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments receivables assets yearend 2014 2013 follows segment sales operating revenues operating segment sales operating revenues including internal transfers years 2014 2013 2012 presented table follows products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived fs38 notes consolidated financial statements millions dollars except pershare amounts crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil activities include revenues power energy services insurance operations real estate activities technology companies effective january 1 2014 international upstream prospectively includes selected amounts previously recognized international downstream material companys results operations financial position segment income taxes segment income tax expense years 2014 2013 2012 follows segment information additional information segmentation major equity affiliates contained note 13 information related properties plant equipment segment contained note 14 page fs41 fs39 notes consolidated financial statements millions dollars except pershare amounts note 13 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2014 company’s carrying value investment tco 150 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 8 page fs34 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company operates hamaca heavyoil production upgrading project venezuela’s orinoco belt december 31 2014 company’s carrying value investment petropiar approximately 160 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company investments advances totaling 1487 includes longterm loans 1328 yearend 2014 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela december 31 2014 company’s carrying value investment petroboscan approximately 160 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets fs40 notes consolidated financial statements millions dollars except pershare amounts gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals lubricants predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2014 fair value chevron’s share cal common stock approximately 3755 information “sales operating revenues” consolidated statement income includes 10404 14635 17356 affiliated companies 2014 2013 2012 respectively “purchased crude oil products” includes 6735 7063 6634 affiliated companies 2014 2013 2012 respectively “accounts notes receivable” consolidated balance sheet includes 924 1328 due affiliated companies december 31 2014 2013 respectively “accounts payable” includes 345 466 due affiliated companies december 31 2014 2013 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevrons net loans affiliates 874 1129 1494 december 31 2014 2013 2012 respectively note 14 properties plant equipment1 united states australia nigeria country accounted 10 percent company’s net properties plant equipment ppe 2014 australia 41012 31464 21770 2014 2013 2012 respectively nigeria ppe 19214 18429 17485 2014 2013 2012 respectively net dry hole expense related prior years’ expenditures 371 89 80 2014 2013 2012 respectively depreciation expense includes accretion expense 882 627 629 2014 2013 2012 respectively fs41 notes consolidated financial statements millions dollars except pershare amounts note 15 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party seven pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit initiated superior court nueva loja lago agrio ecuador may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment fs42 notes consolidated financial statements millions dollars except pershare amounts february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first second interim awards international arbitration tribunal discussed march 29 2012 matter transferred provincial court national court justice november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court lago agrio approved courtappointed liquidator’s report damages calculated total judgment case 19100 november 13 2013 national court ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 23 2013 chevron appealed decision ecuador constitutional court ecuadors highest court agreed consider appeal march 20 2014 july 2 2013 provincial court lago agrio issued embargo order ecuador ordering funds paid government ecuador chevron satisfy 96 award issued unrelated action arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law must paid lago agrio plaintiffs award issued tribunal united statesecuador bilateral investment treaty action filed 2006 connection seven breach contract cases texpet filed government ecuador 1991 1993 government ecuador moved set aside tribunals award september 26 2014 supreme court netherlands issued opinion denying ecuador’s set aside request federal district court district columbia confirmed tribunals award government ecuador appealed district courts decision chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment may 1 2013 ontario superior court justice held court jurisdiction chevron canada limited purposes action stayed action due absence evidence chevron corporation assets ontario lago agrio plaintiffs appealed decision december 17 2013 court appeals ontario affirmed lower court’s decision jurisdiction set aside stay allowing recognition enforcement action heard ontario superior court justice chevron appealed decision concerning jurisdiction supreme court canada january 16 2014 court appeals ontario granted chevron’s motion stay recognition enforcement proceeding pending decision admissibility supreme court appeal april 3 2014 supreme court canada granted chevron’s chevron canada limited’s petitions appeal ontario court appeal’s decision april 8 2014 chevron canada limited filed notices appeal canada supreme court june 27 2012 lago agrio plaintiffs filed action chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment october 15 2012 provincial court lago agrio issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary ingeniero norberto fs43 notes consolidated financial statements millions dollars except pershare amounts priu requiring shares companies embargoed requiring third parties withhold 40 percent payments due chevron argentina srl ordering banks withhold 40 percent funds chevron argentina srl bank accounts december 14 2012 argentinean court rejected motion revoke freeze order modified ordering third parties required withhold funds must report payments court also clarified freeze order relating bank accounts excludes taxes january 30 2013 appellate court upheld freeze order june 4 2013 supreme court argentina revoked freeze order entirety december 12 2013 lago agrio plaintiffs served chevron notice filing enforcement proceeding national court first instance argentina chevron filed answer february 27 2014 chevron intends vigorously defend proceeding chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador enforcement action chevron expects continue vigorous defense imposition liability ecuadorian courts contest defend enforcement actions chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 tribunal issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal january 25 2012 tribunal converted order interim measures interim award chevron filed renewed application interim measures january 4 2012 republic ecuador opposed chevron’s application requested existing order interim measures vacated january 9 2012 february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron particular preclude certification republic ecuador would cause judgment enforceable chevron february 27 2012 tribunal issued third interim award confirming jurisdiction hear chevrons arbitration claims february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” republic ecuador filed district court hague request set aside tribunal’s interim awards first partial award described chevron filed answer set aside request december 31 2014 tribunal divided merits phase proceeding three phases september 17 2013 tribunal issued first partial award phase one finding settlement agreements republic ecuador texpet applied texpet chevron released texpet chevron claims based collective diffuse rights arising texpets operations former concession area precluded third parties asserting collectivediffuse rights environmental claims relating texpets operations former concession area preclude individual claims personal harm chevron awaits ruling tribunal whether claims lago agrio plaintiffs individual collectivediffuse tribunal set phase two begin january 20 2014 hear chevrons denial justice claims january 2 2014 tribunal postponed phase two held procedural hearing january 2021 2014 tribunal held hearing april 2930 2014 address remaining issues relating phase one also set hearing april 20 may 6 2015 address phase two issues tribunal set date phase three damages phase arbitration series us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes fs44 notes consolidated financial statements millions dollars except pershare amounts declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable march 7 2011 federal district court issued preliminary injunction prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case pending resolution chevron’s civil lawsuit federal district court may 31 2011 federal district court severed claims one eight chevron’s complaint ninth claim declaratory relief imposed discovery stay claims one eight pending trial ninth claim declaratory relief september 19 2011 us court appeals second circuit vacated preliminary injunction stayed trial chevron’s ninth claim declaratory relief set november 14 2011 denied defendants’ mandamus petition recuse judge hearing lawsuit second circuit issued opinion january 26 2012 ordering dismissal chevron’s ninth claim declaratory relief february 16 2012 federal district court lifted stay claims one eight october 18 2012 federal district court set trial date october 15 2013 march 22 2013 chevron settled claims stratus consulting april 12 2013 sworn declarations representatives stratus consulting filed court admitting role plaintiffs attorneys drafting environmental report mining engineer appointed provincial court lago agrio september 26 2013 second circuit denied defendants petition writ mandamus recuse judge hearing case collaterally estop chevron seeking declaration lago agrio judgment obtained fraud unlawful conduct trial commenced october 15 2013 concluded november 22 2013 march 4 2014 federal district court entered judgment favor chevron prohibiting defendants seeking enforce lago agrio judgment united states prohibiting profiting illegal acts defendants filed notices appeal march 18 2014 ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’ submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 16 taxes 2014 beforetax income us operations including related corporate charges 6296 compared beforetax income 4672 8456 2013 2012 respectively international operations beforetax income 24906 31233 37876 2014 2013 2012 respectively us federal income tax expense reduced 68 175 165 2014 2013 2012 respectively business tax credits fs45 notes consolidated financial statements millions dollars except pershare amounts reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table company’s effective tax rate decreased 399 percent 2013 381 percent 2014 decrease primarily resulted impact changes jurisdictional mix equity earnings tax effects related 2014 sale interests chad cameroon partially offset onetime ongoing tax charges company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2014 increased approximately 3300 yearend 2013 increase primarily related increased temporary differences property plant equipment deferred tax assets increased approximately 1900 2014 increases primarily related increased temporary differences employee benefits overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2014 company tax loss carryforwards approximately 5535 tax credit carryforwards approximately 1190 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2015 2029 us foreign tax credit carryforwards 11867 expire 2015 2024 december 31 2014 2013 deferred taxes classified consolidated balance sheet follows fs46 notes consolidated financial statements millions dollars except pershare amounts income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 35700 december 31 2014 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable possible remittance earnings intended reinvested indefinitely end 2014 deferred income taxes recorded undistributed earnings certain international operations indefinite reinvestment earnings planned company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2014 2013 2012 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included decrease unrecognized tax benefits december 31 2013 december 31 2014 primarily due expiration certain us foreign tax credits 2014 impact companys results operations approximately 68 percent 3552 unrecognized tax benefits december 31 2014 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2014 jurisdictions latest years income tax examinations finalized follows united states 2008 nigeria 2000 angola 2001 saudi arabia 2012 kazakhstan 2007 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2014 accruals 233 anticipated interest penalty obligations included consolidated balance sheet compared accruals 215 yearend 2013 income tax expense benefit associated interest penalties 4 42 145 2014 2013 2012 respectively fs47 notes consolidated financial statements millions dollars except pershare amounts taxes income note 17 longterm debt total longterm debt excluding capital leases december 31 2014 23960 company’s longterm debt outstanding yearend 2014 2013 follows interest rate december 31 2014 weightedaverage interest rate december 31 2014 chevron automatic shelf registration statement expires 2015 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt 15960 matures follows 2015 0 2016 1450 2017 3750 2018 2000 2019 2650 2019 6110 november 2014 4000 chevron corporation bonds issued see note 9 beginning page fs34 information concerning fair value company’s longterm debt fs48 notes consolidated financial statements millions dollars except pershare amounts note 18 shortterm debt weightedaverage interest rates december 31 2014 2013 012 percent 009 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2014 company interest rate swaps shortterm debt december 31 2014 company 8000 committed credit facilities various major banks expiring december 2016 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2014 december 31 2014 2013 company classified 8000 shortterm debt longterm settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis note 19 new accounting standards revenue recognition topic 606 revenue contracts customers asu 201409 may 2014 fasb issued asu 201409 becomes effective company january 1 2017 early adoption permitted standard provides entity recognize revenue align transfer promised goods services customers amount reflects consideration entity expects entitled receive exchange goods services asu replaces existing revenue recognition guidance us gaap provides fivestep model recognition revenue guidance accounting certain costs obtaining fulfilling contracts customers specific disclosure requirements transition guidance permits either retrospective application presentation cumulative effect adoption date company reviewing requirements asu determine transition method apply update assessments developed throughout fasb’s deliberation period company evaluating effect standard company’s consolidated financial statements note 20 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well b business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fs49 notes consolidated financial statements millions dollars except pershare amounts following table indicates changes company’s suspended exploratory well costs three years ended december 31 2014 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 2673 exploratory well costs capitalized one year december 31 2014 1460 21 projects related projects drilling activities way firmly planned near future 1213 balance related 30 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1213 referenced following activities associated assessing reserves projects’ economic viability 289 six projects undergoing frontend engineering design final investment decision expected within two years b 213 three projects development concept review government c 600 10 projects development alternatives review 111 11 projects miscellaneous activities projects smaller amounts suspended progress made 51 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects approximately half decisions expected occur next five years 2673 suspended well costs capitalized period greater one year december 31 2014 represents 209 exploratory wells 51 projects tables contain aging costs well project basis note 21 stock options sharebased compensation expense stock options 2014 2013 2012 287 186 tax 292 190 tax 283 184 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 71 46 tax 223 145 tax 177 115 tax 2014 2013 2012 respectively significant stockbased compensation cost capitalized december 31 2014 december 31 2013 fs50 notes consolidated financial statements millions dollars except pershare amounts cash received payment option exercises sharebased payment arrangements 2014 2013 2012 527 553 753 respectively actual tax benefits realized tax deductions option exercises 54 73 101 2014 2013 2012 respectively cash paid settle performance units stock appreciation rights 204 186 123 2014 2013 2012 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2014 contractual terms vary three years performance units 10 years stock options stock appreciation rights unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans unexercised awards began expiring early 2010 continue expire early 2015 fair market values stock options stock appreciation rights granted 2014 2013 2012 measured date grant using blackscholes optionpricing model following weightedaverage assumptions 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2014 presented total intrinsic value ie difference exercise price market price options exercised 2014 2013 2012 398 445 580 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2014 226 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plans cost expected recognized weightedaverage period 17 years january 1 2014 number ltip performance units outstanding equivalent 2531270 shares 2014 772800 units granted 967234 units vested cash proceeds distributed recipients 70884 units forfeited december 31 2014 units outstanding 2265952 fair value liability recorded instruments 212 measured using monte carlo simulation method addition outstanding stock appreciation rights awards granted various ltip former unocal programs totaled approximately 33 million equivalent shares december 31 2014 liability 78 recorded awards fs51 notes consolidated financial statements millions dollars except pershare amounts note 22 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension postretirement benefit plans 2014 2013 follows amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2014 2013 include fs52 notes consolidated financial statements millions dollars except pershare amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 7417 5464 end 2014 2013 respectively amounts consisted accumulated benefit obligations us international pension plans 12833 4995 respectively december 31 2014 10876 5108 respectively december 31 2013 information us international pension plans accumulated benefit obligation excess plan assets december 31 2014 2013 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2014 2013 2012 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2014 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 15 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2015 company estimates actuarial losses 356 81 34 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 216 recognized “accumulated comprehensive loss” 2015 related lumpsum settlement costs us pension plans fs53 notes consolidated financial statements millions dollars except pershare amounts weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2014 approximately 5 9 years us international pension plans respectively 7 years postretirement benefit plans 2015 company estimates prior service credits costs 9 22 14 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2014 company used expected longterm rate return 75 percent us pension plan assets account 72 percent company’s pension plan assets 2013 2012 company used longterm rate return 75 plan marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds december 31 2014 company used 37 percent discount rate us pension plans 41 percent main us opeb plan discount rates plans end 2013 43 47 percent respectively 2012 36 39 percent plans respectively benefit assumptions measurement accumulated postretirement benefit obligation december 31 2014 main us postretirement medical plan assumed health care costtrend rates start 70 percent 2015 gradually decline 45 percent 2025 beyond measurement december 31 2013 assumed health care costtrend rates started 73 percent 2014 gradually declined 45 percent 2025 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans fs54 notes consolidated financial statements millions dollars except pershare amounts plan assets investment strategy fair value hierarchy inputs company uses value pension assets divided three levels level 1 fair values assets measured using unadjusted quoted prices assets prices identical assets active markets plans ability access level 2 fair values assets measured based quoted prices similar assets active markets quoted prices identical similar assets inactive markets inputs quoted prices observable asset inputs derived principally corroborated observable market data correlation means asset contractual term level 2 input observable substantially full term asset fair values level 2 assets generally obtained thirdparty broker quotes independent pricing services exchanges level 3 inputs fair value measurement unobservable assets valuation may performed using financial model incorporating estimated inputs fair value measurements company’s pension plans 2014 2013 us equities include investments company’s common stock amount 24 december 31 2014 28 december 31 2013 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 fs55 notes consolidated financial statements millions dollars except pershare amounts effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 91 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys benefit plan investment committee established following approved asset allocation ranges equities 4070 percent fixed income cash 2060 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines reviewed regularly equities 3050 percent fixed income cash 3565 percent real estate 515 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset class risk mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2014 company contributed 99 293 us international pension plans respectively 2015 company expects contributions approximately 350 us plan 250 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 198 2015 200 paid 2014 following benefit payments include estimated future service expected paid company next 10 years fs56 notes consolidated financial statements millions dollars except pershare amounts employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 316 163 243 2014 2013 2012 respectively amounts esip expense 2013 2012 net 140 43 respectively reflect value common stock released former leveraged employee stock ownership plan lesop debt retired 2013 remaining shares released benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2014 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2014 2013 trust assets 38 40 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 965 871 898 2014 2013 2012 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 21 beginning page fs50 note 23 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 16 beginning page fs45 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees company’s guarantee 485 associated certain payments terminal use agreement entered equity affiliate approximate 13year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate fs57 notes consolidated financial statements millions dollars except pershare amounts approximate amounts required payments various commitments 2015 3600 2016 3000 2017 2300 2018 2100 2019 1600 2020 4500 portion commitments may ultimately shared project partners total payments agreements approximately 3700 2014 3600 2013 3600 2012 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2014 1683 included balance remediation activities approximately 164 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2014 456 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2014 environmental reserves balance 1227 868 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 359 associated various sites international downstream 79 upstream 275 businesses 5 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2014 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 24 discussion company’s asset retirement obligations contingencies april 26 2010 california appeals court issued ruling related adequacy environmental impact report eir supporting issuance certain permits city richmond california replace upgrade certain facilities chevrons refinery richmond settlement discussions plaintiffs case ended late fourth quarter 2010 march 3 2011 trial court entered final judgment peremptory writ ordering city set aside project eir conditional use permits enjoining chevron work may 23 2011 company filed application city planning department conditional use permit revised project complete construction hydrogen plant certain sulfur removal facilities related infrastructure fs58 notes consolidated financial statements millions dollars except pershare amounts june 10 2011 city published notice preparation revised eir project march 18 2014 revised draft eir published public comment public comment period closed may 2014 final eir released june 9 2014 july 29 2014 richmond city council certified eir approved conditional use permit company seeking secure necessary approvals resume construction although city council certified eir management believes outcomes associated project uncertain due uncertainty companys future course action potential outcomes action combination actions management believe estimate financial effects made time chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods note 24 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2014 2013 2012 table amounts associated revisions estimated cash flows generally reflect increasing costs complex well abandonments accelerated timing abandonment longterm portion 15053 balance end 2014 14246 note 25 financial information earnings 2014 included aftertax gains approximately 3000 relating sale nonstrategic properties amount approximately 1800 1000 200 related upstream downstream assets respectively earnings 2013 included aftertax gains approximately 500 relating sale nonstrategic properties amount approximately 300 200 related downstream upstream assets respectively earnings 2014 included aftertax charges approximately 1000 impairments asset writeoffs 800 related upstream 200 mining asset earnings 2013 included aftertax charges approximately 400 impairments asset writeoffs 300 related upstream 100 assets investments fs59 notes consolidated financial statements millions dollars except pershare amounts financial information follows includes 118 244 202 2014 2013 2012 respectively company’s share equity affiliates’ foreign currency effects company 4593 goodwill consolidated balance sheet related 2005 acquisition unocal 2011 acquisition atlas energy inc company tested goodwill impairment 2014 concluded impairment necessary five year financial summary unaudited fs60 supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved table costs incurred exploration property acquisitions development1 fs61 supplemental information oil gas producing activities unaudited reserves changes estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 13 beginning page fs40 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs62 supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2014 2013 2012 shown following table net income exploration production activities reported page fs38 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs38 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page fs59 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses fs63 supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 24 “asset retirement obligations” page fs59 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel fs64 supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available fs65 supplemental information oil gas producing activities unaudited proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager corporate reserves corporate department reports directly vice chairman responsible company’s worldwide exploration production activities manager corporate reserves 30 years’ experience working oil gas industry master science petroleum engineering degree stanford university experience includes 15 years managing oil gas reserves processes chairman society petroleum engineers oil gas reserves committee served united nations expert group resources classification past member joint committee reserves evaluator training california conservation committee active member society petroleum evaluation engineers serves society petroleum engineers oil gas reserves committee rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates reserves activities managed two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance corporate reserves manual technologies used establishing proved reserves additions 2014 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves end 2014 proved undeveloped reserves totaled 50 billion barrels oilequivalent boe decrease 174 million boe yearend 2013 decrease due transfer 646 million boe proved developed 2 million boe sales partially offset increases 277 million boe extensions discoveries 169 million boe revisions 28 million boe improved recovery 2014 investments totaling approximately 154 billion oil gas producing activities 29 billion nonoil gas producing activities expended advance development proved undeveloped reserves australia accounted 71 billion total mainly development construction activities gorgon wheatstone lng projects expenditures 34 billion united states related primarily various development activities gulf mexico midcontinent region asia expenditures year totaled approximately 33 billion primarily related development projects tco affiliate kazakhstan thailand africa 28 billion expended various offshore development natural gas projects nigeria angola development activities canada brazil primarily responsible 16 billion expenditures americas fs66 supplemental information oil gas producing activities unaudited reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2014 company held approximately 25 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 700 million boe remained undeveloped five years related gorgon project company currently constructing liquefaction facilities australia develop natural gas africa approximately 400 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos gas projects nigeria affiliates account 11 billion boe proved undeveloped reserves remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2014 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 44 percent 46 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities three years ending december 31 2014 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2014 proved reserves company 111 billion boe company’s estimated net proved reserves liquids including crude oil condensate natural gas liquids synthetic oil years 2012 2013 2014 shown table page fs68 company’s estimated net proved reserves natural gas shown page fs69 noteworthy changes liquids proved reserves 2012 2014 discussed shown table following page revisions 2012 improved field performance drilling associated gulf mexico projects accounted majority 104 million barrel increase united states asia drilling results across numerous assets drove 97 million barrel increase improved field performance various nigeria angola producing assets primarily responsible 66 million barrel increase africa improved plant efficiency tco affiliate responsible large portion 59 million barrel increase 2013 improved field performance various nigeria angola producing assets primarily responsible 94 million barrel increase africa asia drilling performance across numerous assets resulted 84 million barrel increase improved field performance drilling associated gulf mexico projects drilling midland delaware basins accounted majority 55 million barrel increase united states synthetic oil reserves canada increased 40 million barrels primarily due improved field performance 2014 drilling midland delaware basins improved field performance drilling california accounted majority 90 million barrel increase united states improved field performance various nigeria fields primarily responsible 74 million barrel increase africa asia drilling performance across numerous assets primarily indonesia resulted 80 million barrel increase improved recovery 2012 improved recovery increased reserves 77 million barrels primarily due secondary recovery performance africa gulf mexico fields united states 2013 improved recovery increased reserves 57 million barrels due numerous small projects including expansions existing projects united states europe asia africa 2014 improved recovery increased reserves 34 million barrels primarily due secondary recovery projects united states mostly related steamflood expansions california fs67 supplemental information oil gas producing activities unaudited extensions discoveries 2012 extensions discoveries increased reserves 101 million barrels americas primarily due initial booking hebron project canada united states additions several gulf mexico projects drilling activities midcontinent region primarily responsible 77 million barrel increase 2013 extensions discoveries midland delaware basins primarily responsible 55 million barrel increase united states 2014 extensions discoveries midland delaware basins gulf mexico primarily responsible 164 million barrel increase united states purchases 2014 purchase additional reserves canada responsible 26 million barrel increase synthetic oil sales 2014 sale company’s interests chad responsible 20 million barrel decrease africa net proved reserves crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 142 141 121 south america 96 102 2014 2013 2012 respectively reserves associated canada ending reserve balances africa 37 41 south america 108 117 123 2014 2013 2012 respectively included yearend reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 19 percent 20 percent 20 percent consolidated companies 2014 2013 2012 respectively fs68 supplemental information oil gas producing activities unaudited net proved reserves natural gas ending reserve balances north america south america 59 54 49 1064 1246 1426 2014 2013 2012 respectively ending reserve balances africa south america 1043 1009 1068 189 177 174 2014 2013 2012 respectively total “as sold” volumes 1695 bcf 1702 bcf 1666 bcf 2014 2013 2012 respectively 2013 conformed 2014 presentation includes reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 19 percent 20 percent 21 percent consolidated companies 2014 2013 2012 respectively noteworthy changes natural gas proved reserves 2012 2014 discussed shown table revisions 2012 net revisions 1007 bcf asia primarily due development drilling additional compression bangladesh drilling results improved field performance thailand australia updated reservoir data interpretation based additional drilling gorgon project drove 358 bcf increase drilling results activities marcellus shale responsible majority 318 bcf increase united states 2013 net revisions 627 bcf asia primarily due development drilling improved field performance bangladesh thailand australia drilling performance drove 229 bcf increase majority net decrease 234 bcf united states due change development plans appalachian region 2014 net revisions 775 bcf australia primarily due development drilling gorgon extensions discoveries 2012 extensions discoveries 747 bcf australia primarily due positive drilling results gorgon project 2013 extensions discoveries 951 bcf united states primarily appalachian region 2014 extensions discoveries 614 bcf united states primarily appalachian region delaware basin sales 2012 sale portion companys equity interest wheatstone project responsible 439 bcf reduction australia fs69 supplemental information oil gas producing activities unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows 2012 2013 conformed 2014 presentation fs70 supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” 1 2012 2013 conformed 2014 presentation fs71 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts see also note 18 consolidated financial statements beginning page fs45 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 25th day february 2016 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 25th day february 2016 principal executive officer director john watson john watson chairman board chief executive officer principal financial officer patricia e yarrington patricia e yarrington vice president chief financial officer principal accounting officer jeanette l ourada jeanette l ourada vice president comptroller mary francis mary francis attorneyinfact directors alexander b cummings jr alexander b cummings jr linnet f deily linnet f deily robert e denham robert e denham alice p gast alice p gast enrique hernandez jr enrique hernandez jr jon huntsman jr jon huntsman jr charles w moorman iv charles w moorman iv john g stumpf john g stumpf ronald sugar ronald sugar inge g thulin inge g thulin carl ware carl ware page intentionally left blank financial table contents fs1 managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page fs6 discussion financial results major operating area three years ended december 31 2015 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil canada china colombia democratic republic congo denmark indonesia kazakhstan myanmar nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela earnings company depend mostly profitability upstream business segment biggest factor affecting results operations upstream segment price crude oil price crude oil fallen significantly since midyear 2014 reflecting persistently high global crude oil inventories production downturn price crude oil impacted depending upon duration continue significantly impact companys results operations cash flows leverage capital exploratory investment program production outlook company responding reductions operating expenses including employee reductions capital exploratory expenditures 2016 future periods increased asset sales company anticipates crude oil prices increase future continued growth demand slowing supply growth bring global markets balance however timing increase unknown companys downstream business crude oil largest cost component refined products refer cautionary statement relevant forwardlooking information page 2 risk factors part item 1a pages 21 23 discussion inherent risks could materially impact companys results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning page fs6 discussions net gains asset sales 2015 asset dispositions restructurings may also occur future periods could result significant gains losses company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning fs2 managements discussion analysis financial condition results operations comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels technology advancements production quotas actions imposed organization petroleum exporting countries opec actions regulators weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control including among things general level inflation commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services recent years chevron oil gas industry generally experienced increase certain costs exceeded general trend inflation many areas world result decline prices crude oil commodities since mid2014 cost pressures softened capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest delays construction factors chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 52 per barrel fullyear 2015 compared 99 2014 midfebruary 2016 brent price 31 per barrel majority company’s equity crude production priced based brent benchmark prices firmed first half 2015 declined remainder year amid persistently high global crude oil inventories production wti price averaged 49 per barrel fullyear 2015 compared 93 2014 midfebruary 2016 wti price 29 per barrel wti traded discount brent throughout 2015 due high inventories excess crude supply us market lifting us crude oil export ban december 2015 spread wti brent narrowed substantially wti traded around parity february 2016 differential crude oil prices exists highquality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated relative supplydemand balances crude type functions capacity refineries able process feedstock highvalue light products motor gasoline jet fuel aviation gasoline diesel fuel secondhalf 2015 differential expanded north america canadian heavy crude production recovered earlier planned unplanned outages light sweet crude prices us supported reductions rig count slowing domestic production growth outside north fs3 managements discussion analysis financial condition results operations america high refinery runs europe asia supported pricing light sweet crude atlantic basin increased output iraq middle east producers pressured values heavier sour crudes chevron produces shares production heavy crude oil california indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs11 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets fluctuations price natural gas united states closely associated customer demand relative volumes produced stored north america united states prices henry hub averaged 262 per thousand cubic feet mcf 2015 compared 428 2014 midfebruary 2016 henry hub spot price 192 per mcf outside united states price changes natural gas depend wide range supply demand regulatory circumstances chevron sells natural gas domestic pipeline market locations chevron investing longterm projects install infrastructure produce liquefy natural gas transport tanker markets companys longterm contract prices liquefied natural gas lng typically linked crude oil prices approximately 85 percent equity lng offtake operated australian lng projects targeted sold binding longterm contracts remainder sold asian spot lng market asian spot market reflects supply demand lng pacific basin directly linked crude oil prices international natural gas realizations averaged 453 per mcf 2015 compared 578 per mcf 2014 see page fs11 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2015 averaged 2622 million barrels per day onefifth company’s net oilequivalent production 2015 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait opec quotas effect company’s net crude oil production 2015 2014 december 2015 meeting members opec agree target production level january 2016 western sanctions iran lifted opec output considered likely increase recent levels approximately 315 million barrels per day iranian production exports recover company estimates net oilequivalent production 2016 flat 4 percent growth compared 2015 estimate subject many factors uncertainties including duration low price environment began secondhalf 2014 quotas actions may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions fs4 managements discussion analysis financial condition results operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states partitioned zone saudi arabia kuwait production shutin beginning may 2015 result difficulties securing work equipment permits net oilequivalent production partitioned zone 2014 81000 barrels per day 2015 net oilequivalent production averaged 28000 barrels per day early 2016 production remains shutin exact timing production restart uncertain dependent dispute resolution saudi arabia kuwait financial effects loss production 2015 significant expected significant 2016 net proved reserves consolidated companies affiliated companies totaled 112 billion barrels oilequivalent yearend 2015 increase 1 percent yearend 2014 reserve replacement ratio 2015 107 percent refer table v beginning page fs65 tabulation company’s proved net oil gas reserves geographic area beginning 2013 yearend 2013 2015 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2015 refer “results operations” section pages fs6 fs8 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast asia southern africa chevron operates significant ownership interests refineries areas refer “results operations” section pages fs6 fs8 additional discussion company’s downstream operations consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies operating developments key operating developments events 2015 early 2016 included following upstream angolarepublic congo joint development area achieved first production lianzi project australia progressed lng train 1 commissioning startup activities gorgon project first cargo lifting expected march 2016 train 2 modules installed remaining train 3 modules delivered january 2016 progressed construction wheatstone project major milestones reached include installation offshore platform topsides subsea pipelines structures along delivery lng train 1 common modules announced natural gas discovery isosceles carnarvon basin 50 percentowned block wa392p bangladesh achieved first liquids bibiyana expansion liquid recovery unit china achieved first production chuandongbei project early 2016 fs5 managements discussion analysis financial condition results operations republic congo announced start production first phase moho nord project united states announced successful appraisal well anchor prospect deepwater gulf mexico downstream australia completed sale company’s 50 percent interest caltex australia limited new zealand completed sale company’s interest new zealand refining company limited reached agreement sell company’s marketing operations common stock dividends 2015 annual dividend 428 per share making 2015 28th consecutive year company increased annual dividend payout results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 14 beginning page fs37 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream us upstream operations incurred loss 406 billion 2015 compared earnings 333 billion 2014 decrease primarily due lower crude oil natural gas realizations 486 billion 570 million respectively higher depreciation expenses 219 billion higher exploration expenses 650 million increase depreciation exploration expenses primarily due impairments project cancellations lower gains asset sales also contributed decrease current year gains 110 million compared 700 million 2014 partially offsetting effects higher crude oil production 900 million lower operating expenses 450 million us upstream earnings 333 billion 2014 decreased 717 million 2013 primarily due lower crude oil prices 950 million higher depreciation expenses 440 million higher operating expenses 210 million also contributed decline partially offsetting decrease gains asset sales 700 million 2014 compared 60 million 2013 higher natural gas realizations 150 million higher crude oil production 100 million fs6 managements discussion analysis financial condition results operations company’s average realization us crude oil natural gas liquids 2015 4270 per barrel compared 8413 2014 9346 2013 average natural gas realization 192 per thousand cubic feet 2015 compared 390 2014 337 2013 net oilequivalent production 2015 averaged 720000 barrels per day 8 percent 2014 10 percent 2013 2015 2014 production increases due project rampups gulf mexico permian basin texas new mexico partially offset effect asset sales normal field declines 2014 2013 production increases permian basin texas new mexico marcellus shale western pennsylvania partially offset normal field declines net liquids component oilequivalent production 2015 averaged 501000 barrels per day 10 percent 2014 12 percent 2013 net natural gas production averaged 13 billion cubic feet per day 2015 5 percent 2014 2013 refer “selected operating data” table page fs11 threeyear comparison production volumes united states international upstream international upstream earnings 209 billion 2015 compared 1357 billion 2014 decrease periods primarily due lower crude oil natural gas realizations 1057 billion 880 million respectively higher depreciation expenses 111 billion primarily reflecting impairments lower gains asset sales also contributed decrease current year gains 370 million compared 110 billion 2014 partially offsetting decrease higher crude oil sales volumes 590 million lower operating expenses 510 million foreign currency effects increased earnings 725 million 2015 compared increase 597 million year earlier international upstream earnings 1357 billion 2014 compared 1677 billion 2013 decrease periods primarily due lower crude oil prices sales volumes 197 billion 400 million respectively also contributing decrease higher depreciation expenses 102 billion mainly related impairments asset writeoffs higher operating tax expenses 340 million 310 million respectively partially offsetting items gains asset sales 110 billion 2014 compared 140 million 2013 foreign currency effects increased earnings 597 million 2014 compared decrease 559 million year earlier company’s average realization international crude oil natural gas liquids 2015 4652 per barrel compared 9042 2014 10026 2013 average natural gas realization 453 per thousand cubic feet 2015 compared 578 591 2014 2013 respectively international net oilequivalent production 190 million barrels per day 2015 essentially unchanged 2014 2 percent 2013 2015 2014 production increases entitlement effects several locations project rampups bangladesh areas offset partitioned zone shutin normal field declines effect asset sales 2014 2013 production increases due project rampups nigeria argentina brazil offset normal field declines production entitlement effects several locations effect asset sales net liquids component international oilequivalent production 124 million barrels per day 2015 decrease approximately 1 percent 2014 decrease approximately 3 percent 2013 international net natural gas production 40 billion cubic feet per day 2015 1 percent 2014 unchanged 2013 refer “selected operating data” table page fs11 threeyear comparison international production volumes fs7 managements discussion analysis financial condition results operations us downstream us downstream operations earned 318 billion 2015 compared 264 billion 2014 increase due higher margins refined product sales 151 billion partially offset absence 2014 asset sale gains 960 million us downstream operations earned 264 billion 2014 compared 787 million 2013 increase earnings mainly due higher margins refined product sales 830 million gains asset sales 960 million 2014 compared 250 million 2013 higher earnings 50 percentowned chevron phillips chemical company llc cpchem 160 million lower operating expenses 80 million also contributed earnings increase refined product sales 123 million barrels per day 2015 increased 1 percent mainly reflecting higher sales jet fuel sales volumes refined products 121 million barrels per day 2014 increase 2 percent 2013 mainly reflecting higher gas oil sales us branded gasoline sales 522000 barrels per day 2015 increased 1 percent 2014 2013 refer “selected operating data” table page fs11 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 442 billion 2015 compared 170 billion 2014 increase primarily due 16 billion gain sale company’s interest caltex australia limited second quarter 2015 higher margins refined product sales 690 million foreign currency effects increased earnings 47 million 2015 compared decrease 112 million year earlier international downstream earned 170 billion 2014 compared 145 billion 2013 increase mainly due favorable change effects derivative instruments 640 million increase partially offset economic buyout legacy pension obligation 160 million 2014 period lower margins refined product sales 130 million higher tax expenses 110 million foreign currency effects decreased earnings 112 million 2014 compared decrease 76 million year earlier total refined product sales 151 million barrels per day 2015 essentially unchanged 2014 excluding effects caltex australia limited divestment refined product sales 107000 barrels per day primarily reflecting higher sales jet fuel gasoline gas oil sales 150 million barrels per day 2014 declined 2 percent 2013 mainly reflecting lower gas oil sales refer “selected operating data” table page fs11 threeyear comparison sales volumes gasoline refined products refinery input volumes consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2015 decreased 935 million 2014 mainly due lower corporate tax items absence 2014 charges related mining assets partially offset higher charges related reductions corporate staffs net charges 2014 increased 365 million 2013 mainly due higher environmental reserve additions asset impairments additional asset retirement obligations mining assets well higher corporate tax items increases partially offset absence 2013 impairments powerrelated affiliates lower corporate charges fs8 managements discussion analysis financial condition results operations consolidated statement income comparative amounts certain income statement categories shown sales operating revenues decreased 2015 primarily due lower refined product crude oil prices partially offset increase refined product crude oil volumes decrease 2014 2013 mainly due lower crude oil volumes lower refined product crude oil prices income equity affiliates decreased 2015 2014 mainly due lower earnings tengizchevroil kazakhstan cpchem angola lng effect sale caltex australia limited second quarter 2015 partially offsetting effects higher earnings gs caltex south korea petropiar venezuela income equity affiliates decreased 2014 2013 mainly due lower upstreamrelated earnings tengizchevroil kazakhstan petropiar petroboscan venezuela angola lng partially offsetting effects higher downstreamrelated earnings gs caltex south korea higher earnings cpchem absence 2013 impairments powerrelated affiliates refer note 15 beginning page fs40 discussion chevron’s investments affiliated companies income 39 billion 2015 included net gains asset sales 32 billion beforetax income 2014 2013 included net gains asset sales 36 billion 710 million beforetax respectively interest income approximately 119 million 2015 145 million 2014 136 million 2013 foreign currency effects increased income 82 million 2015 277 million 2014 103 million 2013 crude oil product purchases 698 billion 2015 mainly due lower crude oil refined product prices partially offset increase crude oil volumes crude oil product purchases 2014 decreased 150 billion prior year mainly due lower crude oil refined product prices along lower crude oil volumes operating selling general administrative expenses decreased 23 billion 2015 2014 decrease included lower fuel costs 920 million also contributing decrease lower expenses construction repair maintenance 300 million contract labor 270 million research technical professional services 200 million operating selling general administrative expenses increased 642 million 2014 2013 increase included higher employee compensation benefit costs 360 million primarily related buyout legacy pension obligation also contributing increase higher transportation costs 350 million primarily reflecting economic buyout longterm contractual obligation higher environmental expenses related mining asset 300 million partially offsetting increase lower fuel expenses 360 million exploration expenses 2015 increased 2014 mainly due higher charges well writeoffs largely related project cancellations exploration expenses 2014 increased 2013 mainly due higher charges well writeoffs partially offset lower geological geophysical expenses fs9 managements discussion analysis financial condition results operations depreciation depletion amortization expenses increased 2015 2014 mainly due impairments oil gas producing fields 35 billion 2015 compared 900 million 2014 also contributing increase higher depreciation rates higher production levels certain oil gas producing fields increase 2014 2013 mainly due higher depreciation rates impairments certain oil gas producing fields impairment mining asset taxes income decreased 2015 2014 mainly due lower crude oil refined product prices taxes income decreased 2014 2013 primarily due decrease duty expense south africa along lower consumer excise taxes thailand reflecting lower sales volumes locations effective income tax rates 3 percent 2015 38 percent 2014 40 percent 2013 decrease effective tax rate 2015 2014 primarily resulted impacts jurisdictional mix onetime tax benefits foreign currency remeasurement equity earnings reduction statutory tax rates united kingdom partially offset effects valuation allowances recognized deferred tax assets sale companys interest caltex australia limited rate decreased 2014 2013 primarily due impact changes jurisdictional mix equity earnings tax effects related 2014 sale interests chad cameroon partially offset onetime ongoing tax charges fs10 managements discussion analysis financial condition results operations selected operating data12 fs11 managements discussion analysis financial condition results operations liquidity capital resources cash equivalents time deposits marketable securities total balances 113 billion 132 billion december 31 2015 2014 respectively cash provided operating activities 2015 195 billion compared 315 billion 2014 350 billion 2013 cash provided operating activities net contributions employee pension plans approximately 09 billion 04 billion 12 billion 2015 2014 2013 respectively cash provided investing activities included proceeds deposits related asset sales 57 billion 2015 57 billion 2014 11 billion 2013 restricted cash 11 billion 15 billion december 31 2015 2014 respectively held cash shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet amounts generally associated upstream abandonment activities tax payments funds held escrow taxdeferred exchanges asset acquisitions divestitures dividends paid common stockholders 80 billion 2015 79 billion 2014 75 billion 2013 debt capital lease obligations total debt capital lease obligations 386 billion december 31 2015 278 billion yearend 2014 108 billion increase total debt capital lease obligations 2015 primarily due funding company’s capital investment program included several large projects construction phase company completed bond issuances 6 billion 5 billion march november 2015 respectively company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 129 billion december 31 2015 compared 118 billion yearend 2014 amounts 80 billion reclassified longterm end periods yearend 2015 settlement obligations expected require use working capital 2016 company intent ability evidenced committed credit facilities refinance longterm basis chevron automatic shelf registration statement expires august 2018 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation february 2016 standard poors corporation changed rating securities aa securities rated aa1 moody’s investors fs12 managements discussion analysis financial condition results operations service company’s us commercial paper rated a1 standard poor’s pl moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company also modify capital spending plans provide flexibility continue paying common stock dividend also remain committed retaining company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 19 consolidated financial statements shortterm debt page fs48 common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits company acquire shares program 2015 inception program 2014 company purchased 1809 million shares 200 billion capital exploratory expenditures capital exploratory expenditures business segment 2015 2014 2013 follows total expenditures 2015 340 billion including 34 billion company’s share equityaffiliate expenditures require cash outlays company 2014 2013 expenditures 403 billion 419 billion respectively including company’s share affiliates’ expenditures 35 billion 27 billion respectively 340 billion expenditures 2015 92 percent 311 billion related upstream activities approximately 92 percent 90 percent expended upstream operations 2014 2013 respectively international upstream accounted 76 percent worldwide upstream investment 2015 76 percent 2014 78 percent 2013 company estimates 2016 capital exploratory expenditures 266 billion including 45 billion spending affiliates planned reduction compared 2015 expenditures response current crude oil market conditions approximately 90 percent total 240 billion budgeted exploration production activities approximately 9 billion planned upstream capital spending existing base producing assets include shale tight resource investments approximately 11 billion related major capital projects currently underway approximately 3 billion relates projects yet sanctioned global exploration funding accounts approximately 1 billion company continue monitor crude oil market conditions restrict capital outlays current oil price conditions persist worldwide downstream spending 2016 estimated 22 billion 16 billion projects united states investments technology companies corporate businesses 2016 budgeted 04 billion noncontrolling interests company noncontrolling interests 12 billion december 31 2015 december 31 2014 distributions noncontrolling interests totaled 128 million 47 million 2015 2014 respectively pension obligations information related pension plan contributions included page fs56 note 23 consolidated financial statements heading “cash contributions benefit payments” fs13 managements discussion analysis financial condition results operations financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2015 book value inventory lower replacement costs based average acquisition costs year approximately 37 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2015 lower 2014 2013 due lower income debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage companys debt ratio 2015 higher 2014 2013 company took debt finance ongoing investment program offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2016 21 billion 2017 19 billion 2018 17 billion 2019 15 billion 2020 11 billion 2020 31 billion portion commitments may ultimately shared project partners total payments agreements approximately 19 billion 2015 37 billion 2014 36 billion 2013 following table summarizes company’s significant contractual obligations excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 23 beginning page fs51 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 80 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20172018 period include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices fs14 managements discussion analysis financial condition results operations direct guarantees company’s guarantee 447 million associated certain payments terminal use agreement entered equity affiliate approximate 12year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications information related indemnifications included page fs57 note 24 consolidated financial statements heading “indemnifications” financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2015 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2015 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies reviewed audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2015 material companys results operations company uses monte carlo simulation method 95 percent confidence level valueatrisk var model estimate maximum potential loss fair value effect adverse changes market conditions derivative commodity instruments held issued oneday holding period used assumption marketrisk positions liquidated hedged within one day based inputs var companys primary risk exposures area derivative commodity instruments december 31 2015 2014 material companys cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2015 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2015 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” note 15 consolidated financial statements page fs41 discussion management believes agreements negotiated terms consistent would negotiated unrelated party fs15 managements discussion analysis financial condition results operations litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page fs42 note 17 consolidated financial statements heading “mtbe” ecuador information related ecuador matters included note 17 consolidated financial statements heading “ecuador” beginning page fs42 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 156 billion asset retirement obligations yearend 2015 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2015 environmental expenditures refer note 24 page fs58 additional discussion environmental remediation provisions yearend reserves refer also note 25 page fs59 additional discussion companys asset retirement obligations suspended wells information related suspended wells included note 21 consolidated financial statements accounting suspended exploratory wells beginning page fs49 income taxes information related income tax contingencies included pages fs45 fs48 note 18 page fs57 note 24 consolidated financial statements heading “income taxes” contingencies information related contingencies included page fs58 note 24 consolidated financial statements heading “other contingencies” environmental matters company subject various international federal state local environmental health safety laws regulations marketbased programs laws regulations programs continue evolve expected increase number complexity time govern manner company conducts operations also products sells example international agreements eg paris accord kyoto protocol national eg carbon tax capandtrade efficiency standards regional state legislation eg californias ab32 low carbon fuel standards regulatory measures eg us environmental protection agencys methane performance standards limit reduce greenhouse gas ghg emissions currently various stages discussion implementation consideration ghg issues responses issues international agreements national regional state legislation regulation integrated company’s strategy planning capital investment reviews applicable also factored company’s longrange supply demand energy price forecasts reflect longrange effects renewable fuel penetration energy efficiency standards climaterelated policy actions demand response oil natural gas prices addition legislation regulations intended address hydraulic fracturing also continue evolve international national state levels refer “risk factors” part item 1a pages 21 23 discussion inherent risks increasingly restrictive environmental regulation could materially impact company’s results operations financial condition fs16 managements discussion analysis financial condition results operations costs complying existing laws regulations pertaining company operations products embedded normal costs business however possible predict certainty amount additional investments new existing technology facilities amounts increased operating costs incurred future prevent control reduce eliminate releases hazardous materials environment remediate restore areas damaged prior releases nitrogen oxide sulfur oxide hazardous materials comply new environmental laws regulations although costs may significant results operations single period company presently expect material adverse effect companys liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2015 approximately 27 billion consolidated companies included expenditures approximately 09 billion environmental capital expenditures 18 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2016 total worldwide environmental capital expenditures estimated 06 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2015 chevrons uop depreciation depletion amortization dda fs17 managements discussion analysis financial condition results operations oil gas properties 139 billion proved developed reserves beginning 2015 47 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2015 would increased approximately 730 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page fs65 changes proved reserve estimates three years ending december 31 2015 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs71 estimates proved reserve values three years ended december 31 2015 oil gas reserves commentary read conjunction properties plant equipment section note 1 consolidated financial statements beginning page fs28 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions generally consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 16 beginning page fs41 section properties plant equipment note 1 summary significant accounting policies beginning page fs28 company routinely performs impairment reviews triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision companys crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value occurs determination must made whether loss otherthantemporary case investment impaired number differing assumptions potentially affecting whether investment impaired period amount impairment sensitivity analysis practicable company reported impairments certain oil gas properties 2015 primarily result downward revisions companys longerterm crude oil price outlook impairments primarily brazil united states material individual impairments ppe investments recorded years 2014 2013 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired resulted larger impacts impaired assets fs18 managements discussion analysis financial condition results operations asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2015 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 25 page fs59 additional discussions asset retirement obligations pension postretirement benefit plans note 23 beginning page fs51 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page fs54 note 23 relevant headings actual rates may vary significantly estimates unanticipated changes worlds financial markets 2015 company used expected longterm rate return 75 percent discount rate 37 percent us pension plans actual return 2015 slightly negative due broad decline financial markets second half year 10 years ending december 31 2015 actual asset returns averaged 50 percent plan additionally exception three years within 10year period actual asset returns plan equaled exceeded 75 percent year total pension expense 2015 12 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 61 percent companywide pension expense would reduced total pension plan expense 2015 approximately 95 million 1 percent increase discount rate plan would reduced pension expense 2015 approximately 221 million aggregate funded status recognized december 31 2015 net liability approximately 45 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2015 company used discount rate 40 percent measure obligations us pension plans indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 63 percent companywide pension obligation would reduced plan obligation approximately 384 million would decreased plan’s underfunded status approximately 17 billion 13 billion company’s opeb plans expense 2015 271 million total liability reflected unfunded status plans end 2015 33 billion main us opeb plan company used 41 percent discount rate measure expense 2015 45 percent discount rate measure benefit obligations december 31 2015 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2015 opeb expense opeb liabilities end 2015 information sensitivity health care costtrend rate refer page fs54 note 23 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page fs53 note 23 description method used amortize 63 billion beforetax actuarial losses recorded company december 31 2015 estimate costs recognized expense 2016 addition information related company contributions included page fs56 note 23 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability fs19 managements discussion analysis financial condition results operations assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 24 beginning page fs57 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2015 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 5 page fs32 information regarding new accounting standards quarterly results stock market data unaudited fs20 fs21 fs22 consolidated statement income millions dollars except pershare amounts fs23 consolidated statement comprehensive income millions dollars fs24 consolidated balance sheet millions dollars except pershare amount fs25 consolidated statement cash flows millions dollars fs26 consolidated statement equity shares thousands amounts millions dollars fs27 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 inputs quoted prices active markets identical assets liabilities level 2 inputs quoted prices included within level 1 directly indirectly observable asset liability level 3 inputs observable market derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending fs28 notes consolidated financial statements millions dollars except pershare amounts determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 21 beginning page fs49 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties company performs impairment reviews country concession psc development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 9 beginning page fs34 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 25 page fs59 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 25 page fs59 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured fs29 notes consolidated financial statements millions dollars except pershare amounts currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs23 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ending december 31 2015 reflected table amounts net tax refer note 23 beginning page fs51 reclassified components totaling 824 included employee benefit costs year ending december 31 2015 related income taxes period totaling 317 reflected income tax expense consolidated statement income reclassified amounts insignificant note 3 noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” fs30 notes consolidated financial statements millions dollars except pershare amounts activity equity attributable noncontrolling interests 2015 2014 2013 follows note 4 information relating consolidated statement cash flows “net increase operating working capital” includes reductions 17 58 79 excess income tax benefits associated stock options exercised 2015 2014 2013 respectively amounts offset equal amount “net sales purchases treasury shares” includes changes postretirement benefits obligations longterm liabilities “net sales purchases treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 2 5006 5004 2015 2014 2013 respectively purchases made companys share repurchase program 2015 2014 2013 company purchased 415 million 416 million common shares 5000 share repurchase program respectively 2015 2014 2013 “net sales purchases shortterm investments” generally consisted restricted cash associated upstream abandonment activities tax payments funds held escrow taxdeferred exchanges asset acquisitions divestitures invested cash shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet consolidated statement cash flows excludes changes consolidated balance sheet affect cash depreciation depletion amortization dry hole expense deferred income tax provision collectively include approximately 3700 noncash reductions properties plant equipment recorded 2015 relating impairments project suspensions associated adverse tax effects primarily result downward revisions companys longerterm crude oil price outlook fs31 notes consolidated financial statements millions dollars except pershare amounts refer also note 25 page fs59 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2015 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 1362 2015 2310 2014 1661 2013 note 5 new accounting standards revenue recognition topic 606 revenue contracts customers asu 201409 july 2015 fasb approved oneyear deferral effective date asu 201409 becomes effective company january 1 2018 early adoption permitted original effective date january 1 2017 standard provides single comprehensive revenue recognition model contracts customers eliminates industryspecific revenue recognition guidance expands disclosure requirements company evaluating effect standard consolidated financial statements company intend proceed early adoption income taxes topic 740 balance sheet classification deferred taxes asu 201517 november 2015 fasb issued asu 201517 becomes effective company january 1 2017 early adoption permitted standard provides deferred income taxes classified noncurrent balance sheet current requirement classify deferred tax assets liabilities based classification underlying asset liability adoption standard impact companys results operations liquidity note 6 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets follows fs32 notes consolidated financial statements millions dollars except pershare amounts rental expenses incurred operating leases 2015 2014 2013 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2015 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 7 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows fs33 notes consolidated financial statements millions dollars except pershare amounts note 8 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 15 beginning page fs40 discussion tco operations summarized financial information 100 percent tco presented table note 9 fair value measurements tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2015 december 31 2014 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2015 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company reported impairments certain oil gas properties 2015 primarily result downward revisions companys longerterm crude oil price outlook impairments primarily brazil united states company reported impairments certain oil gas properties mining asset 2014 investments advances company material investments advances measured fair value nonrecurring basis report 2015 2014 assets liabilities measured fair value recurring basis fs34 notes consolidated financial statements millions dollars except pershare amounts assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 11022 12785 december 31 2015 december 31 2014 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values zero 8 december 31 2015 december 31 2014 respectively fair values cash equivalents bank time deposits classified level 1 reflect cash would received instruments settled december 31 2015 cash equivalents” include investments carryingfair value 1100 1474 december 31 2015 december 31 2014 respectively december 31 2015 investments classified level 1 include restricted funds related upstream abandonment activities tax payments funds held escrow taxdeferred exchanges asset acquisitions divestitures reported “deferred charges assets” consolidated balance sheet longterm debt 25584 15960 december 31 2015 december 31 2014 estimated fair values 25884 16450 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 25117 classified level 1 fair value bonds 767 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2015 2014 material note 10 financial derivative instruments derivative commodity instruments company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2015 december 31 2014 december 31 2013 classification consolidated balance sheet consolidated statement income next page fs35 notes consolidated financial statements millions dollars except pershare amounts consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2015 december 31 2014 consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions right offset concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers note 11 assets held sale december 31 2015 company classified 1449 net properties plant equipment “assets held sale” consolidated balance sheet assets associated upstream downstream operations anticipated sold next 12 months revenues earnings contributions assets 2015 material fs36 notes consolidated financial statements millions dollars except pershare amounts note 12 equity retained earnings december 31 2015 2014 included approximately 15010 14512 respectively company’s share undistributed earnings equity affiliates december 31 2015 114 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron longterm incentive plan addition approximately 120753 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 13 earnings per share basic earnings per share eps based upon “net income attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 22 “stock options sharebased compensation” beginning page fs50 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings note 14 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported international” outside united states fs37 notes consolidated financial statements millions dollars except pershare amounts segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table segment assets segment assets include intercompany investments receivables assets yearend 2015 2014 follows 1 2014 conformed 2015 presentation segment sales operating revenues operating segment sales operating revenues including internal transfers years 2015 2014 2013 presented table next page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil activities include revenues insurance operations real estate activities technology companies fs38 notes consolidated financial statements millions dollars except pershare amounts effective january 1 2014 international upstream prospectively includes selected amounts previously recognized international downstream material segments segment income taxes segment income tax expense years 2015 2014 2013 follows segment information additional information segmentation major equity affiliates contained note 15 page fs40 information related properties plant equipment segment contained note 16 page fs41 fs39 notes consolidated financial statements millions dollars except pershare amounts note 15 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” 2014 conformed 2015 presentation descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2015 company’s carrying value investment tco 150 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 8 page fs34 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company operates hamaca heavyoil production upgrading project venezuela’s orinoco belt december 31 2015 company’s carrying value investment petropiar approximately 160 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company investments advances totaling 1342 includes longterm loans 1098 yearend 2015 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela december 31 2015 company’s carrying value investment petroboscan approximately 140 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets fs40 notes consolidated financial statements millions dollars except pershare amounts gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals lubricants predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 caltex australia ltd chevron sold 50 percent equity ownership interest caltex australia ltd cal second quarter 2015 information “sales operating revenues” consolidated statement income includes 4850 10404 14635 affiliated companies 2015 2014 2013 respectively “purchased crude oil products” includes 4240 6735 7063 affiliated companies 2015 2014 2013 respectively “accounts notes receivable” consolidated balance sheet includes 399 924 due affiliated companies december 31 2015 2014 respectively “accounts payable” includes 286 345 due affiliated companies december 31 2015 2014 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevrons net loans affiliates 410 874 1129 december 31 2015 2014 2013 respectively note 16 properties plant equipment1 united states australia nigeria country accounted 10 percent company’s net properties plant equipment ppe 2015 australia 49205 41012 31464 2015 2014 2013 respectively nigeria ppe 18773 19214 18429 2015 2014 2013 respectively net dry hole expense related prior years’ expenditures 1573 371 89 2015 2014 2013 respectively depreciation expense includes accretion expense 715 882 627 2015 2014 2013 respectively impairments 4066 1274 382 2015 2014 2013 respectively fs41 notes consolidated financial statements millions dollars except pershare amounts note 17 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party seven pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador background chevron defendant civil lawsuit initiated superior court nueva loja lago agrio ecuador may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations lago agrio judgment 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment fs42 notes consolidated financial statements millions dollars except pershare amounts february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first second interim awards international arbitration tribunal discussed march 29 2012 matter transferred provincial court national court justice november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court lago agrio approved courtappointed liquidator’s report damages calculated total judgment case 19100 november 13 2013 national court ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 23 2013 chevron appealed decision ecuador constitutional court ecuadors highest court reporting justice constitutional court heard oral arguments appeal july 16 2015 july 2 2013 provincial court lago agrio issued embargo order ecuador ordering funds paid government ecuador chevron satisfy 96 award issued unrelated action arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law must paid lago agrio plaintiffs award issued tribunal united statesecuador bilateral investment treaty action filed 2006 connection seven breach contract cases texpet filed government ecuador 1991 1993 government ecuador moved set aside tribunals award september 26 2014 supreme court netherlands issued opinion denying ecuador’s set aside request federal district court district columbia confirmed tribunals award august 4 2015 panel us court appeals district columbia circuit affirmed district courts decision september 9 2015 court appeals denied government ecuadors request full appellate court review federal district courts decision lago agrio plaintiffs enforcement actions chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment may 1 2013 ontario superior court justice held court jurisdiction chevron canada limited purposes action stayed action due absence evidence chevron corporation assets ontario lago agrio plaintiffs appealed decision december 17 2013 court appeals ontario affirmed lower court’s decision jurisdiction set aside stay allowing recognition enforcement action heard ontario superior court justice chevron appealed decision supreme court canada september 4 2015 supreme court dismissed appeal affirmed ontario superior court justice jurisdiction chevron canada limited purposes action recognition enforcement proceeding related preliminary motions proceeding ontario superior court justice june 27 2012 lago agrio plaintiffs filed complaint chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment chevron answered complaint accordance brazilian procedure matter referred public prosecutor nonbinding opinion issues raised complaint may 13 2015 public prosecutor issued nonbinding opinion recommended superior court justice reject plaintiffs recognition enforcement request finding among things lago agrio judgment fs43 notes consolidated financial statements millions dollars except pershare amounts procured fraud corruption cannot recognized brazil violates brazilian international public order october 15 2012 provincial court lago agrio issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary ingeniero norberto priu requiring shares companies embargoed requiring third parties withhold 40 percent payments due chevron argentina srl ordering banks withhold 40 percent funds chevron argentina srl bank accounts december 14 2012 argentinean court rejected motion revoke freeze order modified ordering third parties required withhold funds must report payments court also clarified freeze order relating bank accounts excludes taxes january 30 2013 appellate court upheld freeze order june 4 2013 supreme court argentina revoked freeze order entirety december 12 2013 lago agrio plaintiffs served chevron notice filing enforcement proceeding national court first instance argentina chevron filed answer february 27 2014 lago agrio plaintiffs responded december 29 2015 chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador enforcement action chevron expects continue vigorous defense imposition liability ecuadorian courts contest defend enforcement actions companys bilateral investment treaty arbitration claims chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 tribunal issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal january 25 2012 tribunal converted order interim measures interim award chevron filed renewed application interim measures january 4 2012 republic ecuador opposed chevron’s application requested existing order interim measures vacated january 9 2012 february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron particular preclude certification republic ecuador would cause judgment enforceable chevron february 27 2012 tribunal issued third interim award confirming jurisdiction hear chevrons arbitration claims february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” republic ecuador subsequently filed district court hague request set aside tribunal’s interim awards first partial award described january 20 2016 district court denied republics request tribunal divided merits phase proceeding three phases september 17 2013 tribunal issued first partial award phase one finding settlement agreements republic ecuador texpet applied texpet chevron released texpet chevron claims based collective diffuse rights arising texpets operations former concession area precluded third parties asserting collectivediffuse rights environmental claims relating texpets operations former concession area preclude individual claims personal harm tribunal held hearing april 2930 2014 address remaining issues relating phase one march 12 2015 issued nonbinding decision lago agrio plaintiffs complaint face includes claims barred settlement agreement republic ecuador texpet decision tribunal deferred phase two remaining issues phase one including whether republic ecuador breached 1995 settlement agreement remedies fs44 notes consolidated financial statements millions dollars except pershare amounts available chevron texpet result breach phase two issues addressed hearing held april may 2015 tribunal set date phase three damages phase arbitration companys rico action series us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable march 7 2011 federal district court issued preliminary injunction prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case pending resolution chevron’s civil lawsuit federal district court may 31 2011 federal district court severed claims one eight chevron’s complaint ninth claim declaratory relief imposed discovery stay claims one eight pending trial ninth claim declaratory relief september 19 2011 us court appeals second circuit vacated preliminary injunction stayed trial chevron’s ninth claim declaratory relief set november 14 2011 denied defendants’ mandamus petition recuse judge hearing lawsuit second circuit issued opinion january 26 2012 ordering dismissal chevron’s ninth claim declaratory relief february 16 2012 federal district court lifted stay claims one eight october 18 2012 federal district court set trial date october 15 2013 march 22 2013 chevron settled claims stratus consulting april 12 2013 sworn declarations representatives stratus consulting filed court admitting role plaintiffs attorneys drafting environmental report mining engineer appointed provincial court lago agrio september 26 2013 second circuit denied defendants petition writ mandamus recuse judge hearing case collaterally estop chevron seeking declaration lago agrio judgment obtained fraud unlawful conduct trial commenced october 15 2013 concluded november 22 2013 march 4 2014 federal district court entered judgment favor chevron prohibiting defendants seeking enforce lago agrio judgment united states prohibiting profiting illegal acts defendants appealed federal district courts decision april 20 2015 panel us court appeals second circuit heard oral arguments managements assessment ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’ submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 18 taxes fs45 notes consolidated financial statements millions dollars except pershare amounts 2015 beforetax loss us operations including related corporate charges 2877 compared beforetax income 6296 4672 2014 2013 respectively international operations beforetax income 7719 24906 31233 2015 2014 2013 respectively us federal income tax expense reduced 35 68 175 2015 2014 2013 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table 1 2013 2014 conformed 2015 presentation 2 2015 includes onetime tax benefits associated changes uncertain tax positions provisiontoreturn adjustments company’s effective tax rate decreased 381 percent 2014 27 percent 2015 decrease primarily resulted impacts jurisdictional mix onetime tax benefits foreign currency remeasurement equity earnings reduction statutory tax rates united kingdom partially offset effects valuation allowances recognized deferred tax assets sale companys interest caltex australia limited company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2015 decreased approximately 700 yearend 2014 decrease primarily related decreased temporary differences related property plant equipment deferred tax assets essentially unchanged periods reduction us foreign tax credits substantially offset increase foreign tax loss carryforwards overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2015 company tax loss carryforwards approximately 7615 tax credit carryforwards approximately 1249 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2016 2025 us foreign tax credit carryforwards 10534 expire 2017 2024 fs46 notes consolidated financial statements millions dollars except pershare amounts december 31 2015 2014 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 45400 december 31 2015 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable possible remittance earnings intended reinvested indefinitely end 2015 deferred income taxes recorded undistributed earnings certain international operations indefinite reinvestment earnings planned company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2015 2014 2013 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included decrease unrecognized tax benefits december 31 2014 december 31 2015 primarily due resolution numerous audit issues various tax jurisdictions year approximately 71 percent 3042 unrecognized tax benefits december 31 2015 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2015 jurisdictions latest years income tax examinations finalized follows united states 2011 nigeria 2000 angola 2009 saudi arabia 2012 kazakhstan 2007 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits fs47 notes consolidated financial statements millions dollars except pershare amounts consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2015 accruals 399 anticipated interest penalty obligations included consolidated balance sheet compared accruals 233 yearend 2014 income tax expense benefit associated interest penalties 195 4 42 2015 2014 2013 respectively taxes income note 19 shortterm debt weightedaverage interest rates december 31 2015 2014 026 percent 012 percent respectively redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2015 company interest rate swaps shortterm debt december 31 2015 company 8000 committed credit facilities various major banks enable refinancing shortterm obligations longterm basis credit facilities consist 364day facility enables borrowing 6000 renewed additional 364day period company convert amounts outstanding term loan period one year 2000 fiveyear facility expiring december 2020 facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2015 december 31 2015 2014 company classified 8000 shortterm debt longterm settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis fs48 notes consolidated financial statements millions dollars except pershare amounts note 20 longterm debt total longterm debt excluding capital leases december 31 2015 33584 company’s longterm debt outstanding yearend 2015 2014 follows weightedaverage interest rate december 31 2015 interest rate december 31 2015 chevron automatic shelf registration statement expires august 2018 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt 27071 matures follows 2016 1487 2017 6187 2018 5836 2019 2650 2020 4054 2020 6857 company completed bond issuances 6000 5000 march november 2015 respectively see note 9 beginning page fs34 information concerning fair value company’s longterm debt note 21 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well b business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense fs49 notes consolidated financial statements millions dollars except pershare amounts following table indicates changes company’s suspended exploratory well costs three years ended december 31 2015 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 2823 exploratory well costs capitalized one year december 31 2015 1662 20 projects related projects drilling activities way firmly planned near future 1161 balance related 19 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1161 referenced following activities associated assessing reserves projects’ economic viability 190 two projects undergoing frontend engineering design final investment decision expected within four years b 99 one project development concept review government c 814 seven projects development alternatives review 58 nine projects miscellaneous activities projects smaller amounts suspended progress made 39 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects approximately half decisions expected occur next five years 2823 suspended well costs capitalized period greater one year december 31 2015 represents 165 exploratory wells 39 projects tables contain aging costs well project basis note 22 stock options sharebased compensation expense stock options 2015 2014 2013 312 203 tax 287 186 tax 292 190 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 32 21 tax 71 46 tax 223 145 tax 2015 2014 2013 respectively significant stockbased compensation cost capitalized december 31 2015 december 31 2014 fs50 notes consolidated financial statements millions dollars except pershare amounts cash received payment option exercises sharebased payment arrangements 2015 2014 2013 195 527 553 respectively actual tax benefits realized tax deductions option exercises 17 54 73 2015 2014 2013 respectively cash paid settle performance units stock appreciation rights 104 204 186 2015 2014 2013 respectively awards chevron longterm incentive plan ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2015 contractual terms vary three years performance units restricted stock units 10 years stock options stock appreciation rights remaining awards unocal sharebased plans expired early 2015 fair market values stock options stock appreciation rights granted 2015 2014 2013 measured date grant using blackscholes optionpricing model following weightedaverage assumptions 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2015 presented total intrinsic value ie difference exercise price market price options exercised 2015 2014 2013 120 398 445 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2015 190 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plans cost expected recognized weightedaverage period 17 years january 1 2015 number ltip performance units outstanding equivalent 2265952 shares 2015 890000 units granted 828868 units vested cash proceeds distributed recipients 134147 units forfeited december 31 2015 units outstanding 2192937 fair value liability recorded instruments 166 measured using monte carlo simulation method addition outstanding stock appreciation rights awards granted various ltip programs totaled approximately 45 million equivalent shares december 31 2015 liability 51 recorded awards note 23 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations fs51 notes consolidated financial statements millions dollars except pershare amounts contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement benefit opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension opeb plans 2015 2014 follows amounts recognized consolidated balance sheet company’s pension opeb plans december 31 2015 2014 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 6478 7417 end 2015 2014 respectively amounts consisted fs52 notes consolidated financial statements millions dollars except pershare amounts accumulated benefit obligations us international pension plans 12032 4684 respectively december 31 2015 12833 4995 respectively december 31 2014 information us international pension plans accumulated benefit obligation excess plan assets december 31 2015 2014 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2015 2014 2013 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2015 company’s us pension international pension opeb plans amortized straightline basis approximately 10 16 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2016 company estimates actuarial losses 335 56 19 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 324 recognized “accumulated comprehensive loss” 2016 related lumpsum settlement costs main us pension plan weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2015 approximately 4 11 years us international pension plans respectively 7 years opeb plans 2016 company estimates prior service credits costs 9 15 14 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs53 notes consolidated financial statements millions dollars except pershare amounts assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2015 company used expected longterm rate return 75 percent us pension plan assets account 71 percent company’s pension plan assets 2014 2013 company used longterm rate return 75 percent plan marketrelated value assets main us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension opeb plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds december 31 2015 projected cash flows discounted valuation date using yield curve main us pension opeb plans effective discount rates derived analysis 40 percent main us pension plan 45 percent main us opeb plan discount rates plans end 2014 37 41 percent respectively 2013 43 47 percent plans respectively company changed method used estimate service interest costs associated company’s main us pension opeb plans prior years service interest costs estimated utilizing single weightedaverage discount rate derived yield curve used measure defined benefit obligations beginning year new method costs estimated applying spot rates along yield curve relevant projected cash flows change made provide precise measurement service interest costs improving correlation projected benefit cash flows corresponding spot yield curve rates change accounting estimate accounted prospectively beginning year ending december 31 2016 company expect change material effect consolidated financial position liquidity benefit assumptions measurement accumulated postretirement benefit obligation december 31 2015 main us opeb plan assumed health care costtrend rates start 71 percent 2016 gradually decline 45 percent 2025 beyond measurement december 31 2014 assumed health care costtrend rates started 7 percent 2015 gradually declined 45 percent 2025 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions main us plan 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans fs54 notes consolidated financial statements millions dollars except pershare amounts plan assets investment strategy fair value measurements company’s pension plans 2015 2014 us equities include investments company’s common stock amount 9 december 31 2015 24 december 31 2014 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 fs55 notes consolidated financial statements millions dollars except pershare amounts effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 91 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys benefit plan investment committee established following approved asset allocation ranges equities 4070 percent fixed income cash 2060 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines equities 3050 percent fixed income cash 3565 percent real estate 515 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset class risk mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2015 company contributed 641 227 us international pension plans respectively 2016 company expects contributions approximately 650 us plans 250 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying opeb benefits approximately 191 2016 196 paid 2015 following benefit payments include estimated future service expected paid company next 10 years fs56 notes consolidated financial statements millions dollars except pershare amounts employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 316 163 2015 2014 2013 respectively amount esip expense 2013 net 140 reflects value common stock released former leveraged employee stock ownership plan lesop debt retired 2013 remaining shares released benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2015 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2015 2014 trust assets 36 38 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 690 965 871 2015 2014 2013 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 22 beginning page fs50 note 24 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 18 beginning page fs45 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees company’s guarantee 447 associated certain payments terminal use agreement entered equity affiliate approximate 12year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum fs57 notes consolidated financial statements millions dollars except pershare amounts products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2016 2100 2017 1900 2018 1700 2019 1500 2020 1100 2020 3100 portion commitments may ultimately shared project partners total payments agreements approximately 1900 2015 3700 2014 3600 2013 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various operating closed divested sites including limited federal superfund sites analogous sites state laws refineries chemical plants marketing facilities crude oil fields mining sites although company provided known environmental obligations probable reasonably estimable likely company continue incur additional liabilities amount additional future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity chevron’s environmental reserve december 31 2015 1578 included balance 348 related remediation activities approximately 163 sites company identified potentially responsible party provisions federal superfund law analogous state laws provide joint several liability responsible parties future actions regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2015 environmental reserves balance 1230 845 related company’s us downstream operations 58 international downstream operations 323 upstream operations 4 businesses liabilities sites primarily associated company’s plans activities remediate soil groundwater contamination company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2015 recorded liability material company’s results operations consolidated financial position liquidity refer note 25 page fs59 discussion company’s asset retirement obligations contingencies november 7 2011 drilling development well deepwater frade field 75 miles offshore brazil unanticipated pressure spike caused oil migrate well bore series fissures sea floor emitting approximately 2400 barrels oil source seep substantially contained within four days well plugged abandoned march 14 2012 company identified small second seep different part field evidence coastal wildlife impacts related either seeps emerged reported company’s previously filed periodic reports resolved civil claims relating incidents brought brazilian federal district prosecutor also reported previously federal district prosecutor also filed criminal charges chevron and11 chevron employees charges dismissed trial court february 19 2013 reinstated appellate court october 9 2013 upon chevron’s motion reconsideration dismissed appellate court august 27 2015 federal district prosecutor appealed appellate court’s decision chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers individuals amounts claims individually aggregate may significant take lengthy periods resolve may result gains losses future periods company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result significant gains losses future periods fs58 notes consolidated financial statements millions dollars except pershare amounts note 25 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2015 2014 2013 table amounts associated revisions estimated cash flows generally reflect increased cost estimates abandon wells equipment facilities accelerated timing abandonment longterm portion 15642 balance end 2015 14892 note 26 restructuring reorganization costs 2015 company recorded accruals adjustments employee reduction programs related restructuring reorganization corporate staffs certain upstream operations employee reductions expected substantially completed end 2016 beforetax charge 353 223 aftertax recorded 2015 219 reported “operating expenses” 134 reported selling general administrative expense consolidated statement income accrued liability covering severance benefits classified current consolidated balance sheet approximately 134 87 aftertax associated employee reductions 113 73 aftertax us upstream 106 63 aftertax international upstream 2015 company made payments 60 million associated liabilities following table summarizes accrued severance liability classified current consolidated balance sheet note 27 financial information earnings 2015 included aftertax gains approximately 2300 relating sale nonstrategic properties amount approximately 1800 500 related downstream upstream respectively earnings 2014 included aftertax gains approximately 3000 relating sale nonstrategic properties approximately 1800 1000 related upstream downstream assets respectively earnings 2015 included aftertax charges approximately 3000 impairments asset writeoffs related upstream earnings 2014 included aftertax charges approximately 1000 impairments asset writeoffs 800 related upstream 200 mining asset fs59 notes consolidated financial statements millions dollars except pershare amounts financial information follows includes 344 118 244 2015 2014 2013 respectively company’s share equity affiliates’ foreign currency effects company 4588 goodwill consolidated balance sheet related 2005 acquisition unocal 2011 acquisition atlas energy inc company tested goodwill impairment 2015 concluded impairment necessary fiveyear financial summary unaudited fs60 supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved table costs incurred exploration property acquisitions development1 fs61 supplemental information oil gas producing activities unaudited reserves changes estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 15 beginning page fs40 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs62 supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2015 2014 2013 shown following table net income exploration production activities reported page fs38 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs38 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 25 “asset retirement obligations” page fs59 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses fs63 supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 25 “asset retirement obligations” page fs59 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel 2013 2014 conformed 2015 presentation fs64 supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available fs65 supplemental information oil gas producing activities unaudited proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager corporate reserves corporate department separate upstream operating organization manager corporate reserves 30 years’ experience working oil gas industry master science petroleum engineering degree stanford university experience includes 15 years managing oil gas reserves processes chairman society petroleum engineers oil gas reserves committee served united nations expert group resources classification past member joint committee reserves evaluator training california conservation committee active member society petroleum evaluation engineers serves society petroleum engineers oil gas reserves committee rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance corporate reserves manual technologies used establishing proved reserves additions 2015 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves end 2015 proved undeveloped reserves totaled 43 billion barrels oilequivalent boe decrease 687 million boe yearend 2014 decrease due transfer 1027 million boe proved developed 2 million boe sales partially offset increases 273 million boe extensions discoveries 65 million boe revisions 4 million boe improved recovery 2015 investments totaling approximately 143 billion oil gas producing activities 23 billion nonoil gas producing activities expended advance development proved undeveloped reserves australia accounted 64 billion total mainly development construction activities gorgon wheatstone lng projects expenditures 27 billion united states related primarily various development activities gulf mexico midcontinent region asia expenditures year totaled approximately 32 billion primarily related development projects tco affiliate kazakhstan thailand africa 28 billion expended various offshore development natural gas projects nigeria angola republic congo development activities canada primarily responsible 15 billion expenditures americas reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels fs66 supplemental information oil gas producing activities unaudited yearend 2015 company held approximately 22 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 500 million boe remained undeveloped five years related gorgon project company currently constructing liquefaction facilities australia develop natural gas africa approximately 400 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos gas projects nigeria affiliates account 11 billion boe proved undeveloped reserves remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2015 significant reductions commodity prices negatively impacted economic limits oil gas properties resulting proved reserve decreases positively impacted proved reserves due entitlement effects yearend reserves volumes updated circumstances significant changes discussed appropriate reserves sections 2015 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 38 percent 46 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities three years ending december 31 2015 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2015 proved reserves company 112 billion boe company’s estimated net proved reserves liquids including crude oil condensate natural gas liquids synthetic oil years 2013 2014 2015 shown table page fs68 company’s estimated net proved reserves natural gas shown page fs69 noteworthy changes liquids proved reserves 2013 2015 discussed shown table following page revisions 2013 improved field performance various nigeria angola producing assets primarily responsible 94 million barrel increase africa asia drilling performance across numerous assets resulted 84 million barrel increase improved field performance drilling associated gulf mexico projects drilling midland delaware basins accounted majority 55 million barrel increase united states synthetic oil reserves canada increased 40 million barrels primarily due improved field performance 2014 drilling midland delaware basins improved field performance drilling california accounted majority 90 million barrel increase united states improved field performance various nigeria fields primarily responsible 74 million barrel increase africa asia drilling performance across numerous assets primarily indonesia resulted 80 million barrel increase 2015 entitlement effects improved performance responsible the163 million barrel increase tco affiliate kazakhstan asia entitlement effects drilling performance across numerous assets resulted 164 million barrel increase improved field performance various nigerian fields including agbami primarily responsible 60 million barrel increase africa synthetic oil reserves canada increased 80 million barrels primarily due entitlement effects improved recovery 2013 improved recovery increased reserves 57 million barrels due numerous small projects including expansions existing projects united states europe asia africa 2014 improved recovery increased reserves 34 million barrels primarily due secondary recovery projects united states mostly related steamflood expansions california extensions discoveries 2013 extensions discoveries midland delaware basins primarily responsible 55 million barrel increase united states fs67 supplemental information oil gas producing activities unaudited 2014 extensions discoveries midland delaware basins gulf mexico primarily responsible 164 million barrel increase united states 2015 extensions discoveries midland delaware basins primarily responsible 137 million barrel increase united states purchases 2014 purchase additional reserves canada responsible 26 million barrel increase synthetic oil sales 2014 sale company’s interests chad responsible 20 million barrel decrease africa net proved reserves crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 155 142 141 south america 81 96 102 2015 2014 2013 respectively reserves associated canada ending reserve balances africa 34 37 south america 97 108 117 2015 2014 2013 respectively included yearend reserve quantities related productionsharing contracts psc refer page e10 definition psc pscrelated reserve quantities 20 percent 19 percent 20 percent consolidated companies 2015 2014 2013 respectively fs68 supplemental information oil gas producing activities unaudited net proved reserves natural gas ending reserve balances north america south america 174 59 54 540 1064 1246 2015 2014 2013 respectively ending reserve balances africa south america 1044 1043 1009 179 189 177 2015 2014 2013 respectively total “as sold” volumes 1742 bcf 1695 bcf 1702 bcf 2015 2014 2013 respectively 2013 conformed 2014 presentation includes reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 16 percent 19 percent 20 percent consolidated companies 2015 2014 2013 respectively noteworthy changes natural gas proved reserves 2013 2015 discussed shown table revisions 2013 net revisions 627 bcf asia primarily due development drilling improved field performance bangladesh thailand australia drilling performance drove 229 bcf increase majority net decrease 234 bcf united states due change development plans appalachian region 2014 net revisions 775 bcf australia primarily due development drilling gorgon 2015 positive drilling performance wheatstone gorgon responsible 974 bcf increase australia net revisions 480 bcf asia primarily due improved field performance thailand entitlement effects improved performance kazakhstan majority net decrease 435 bcf americas due deferral infill drilling compression projects well drilling results trinidad tobago 218 bcf increase tco affiliate due entitlement effects improved performance extensions discoveries 2013 extensions discoveries 951 bcf united states primarily appalachian region 2014 extensions discoveries 614 bcf united states primarily appalachian region delaware basin 2015 extensions discoveries 659 bcf united states primarily appalachian region midland delaware basins fs69 supplemental information oil gas producing activities unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations includes costs retire existing wells facilities addition future wells facilities necessary produce proved undeveloped reserves estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows 2013 conformed 2014 2015 presentation fs70 supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” 1 2013 conformed 2014 2015 presentation fs71 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts see also note 19 consolidated financial statements beginning page fs49 item 16 form 10k summary applicable signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 23rd day february 2017 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 23rd day february 2017 principal executive officer director john watson john watson chairman board chief executive officer principal financial officer patricia e yarrington patricia e yarrington vice president chief financial officer principal accounting officer jeanette l ourada jeanette l ourada vice president comptroller mary francis mary francis attorneyinfact directors wanda austin wanda austin linnet f deily linnet f deily robert e denham robert e denham alice p gast alice p gast enrique hernandez jr enrique hernandez jr jon huntsman jr jon huntsman jr charles w moorman iv charles w moorman iv dambisa f moyo dambisa f moyo ronald sugar ronald sugar inge g thulin inge g thulin michael k wirth michael k wirth vice chairman board executive vice president page intentionally left blank financial table contents fs1 managements discussion analysis financial condition results operations key financial results refer “results operations” section beginning page fs6 discussion financial results major operating area three years ended december 31 2016 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil canada china colombia democratic republic congo denmark indonesia kazakhstan myanmar nigeria partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela earnings company depend mostly profitability upstream business segment biggest factor affecting results operations upstream segment price crude oil price crude oil fallen significantly since midyear 2014 reflecting persistently high global crude oil inventories production downturn price crude oil impacted depending upon duration continue significantly impact companys results operations cash flows leverage capital exploratory investment program production outlook company responding reductions operating expenses including employee reductions pacing refocusing capital exploratory expenditures increased asset sales company anticipates crude oil prices increase future continued growth demand slowing supply growth bring global markets balance however timing increase unknown companys downstream business crude oil largest cost component refined products companys objective deliver competitive results shareholder value business environment effective tax rate company change substantially periods significant earnings volatility due mix effects impacted absolute level earnings losses whether arise higher lower tax rate jurisdictions result decline increase effective income tax rate one period may indicative expected results future periods note 19 provides company’s effective income tax rate last three years refer cautionary statement relevant forwardlooking information page 2 risk factors part item 1a pages 20 22 discussion inherent risks could materially impact companys results operations financial condition company continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance fs2 managements discussion analysis financial condition results operations value growth refer “results operations” section beginning page fs6 discussions net gains asset sales 2016 asset dispositions restructurings may also occur future periods could result significant gains losses company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry prices crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels technology advancements production quotas actions imposed organization petroleum exporting countries opec actions regulators weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty factors could also inhibit company’s production capacity affected region company closely monitors developments countries operates holds investments seeks manage risks operating facilities businesses longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs however price levels capital exploratory costs operating expenses associated production crude oil natural gas subject external factors beyond company’s control including among things general level inflation commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services result decline prices crude oil commodities since mid2014 costs declined capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest delays construction factors chart shows trend benchmark prices brent crude oil west texas intermediate wti crude oil us henry hub natural gas brent price averaged 44 per barrel fullyear 2016 compared 52 2015 midfebruary 2017 brent price 55 per barrel majority company’s equity crude production priced based brent benchmark crude oil prices remained low much 2016 increased modestly late year opec announced production cuts november 30 2016 opec agreed cap production 325 million barrels per day starting january 2017 wti price averaged 43 per barrel fullyear 2016 compared 49 2015 midfebruary 2017 wti price 53 per barrel wti traded discount brent much 2016 due high inventories excess crude supply us market fs3 managements discussion analysis financial condition results operations differential crude oil prices exists highquality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated relative supplydemand balances crude type functions capacity refineries able process feedstock highvalue light products motor gasoline jet fuel aviation gasoline diesel fuel secondhalf 2016 differential held generally steady north america robust refinery demand supported heavy crude values light sweet crude prices us supported slowing domestic production outside north america differentials steady slightly wider amid wellsupplied light sweet crude markets atlantic basin continued robust middle east exports rising iranian production kept pressure heavier sour crudes differentials widened december light sweet crude values benefited announced opec deal chevron produces shares production heavy crude oil california indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs12 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets fluctuations price natural gas united states closely associated customer demand relative volumes produced stored north america united states prices henry hub averaged 246 per thousand cubic feet mcf 2016 compared 262 2015 midfebruary 2017 henry hub spot price 286 per mcf outside united states price changes natural gas depend wide range supply demand regulatory circumstances chevron sells natural gas domestic pipeline market locations chevron continues invest longterm projects install infrastructure produce liquefy natural gas transport tanker markets companys longterm contract prices liquefied natural gas lng typically linked crude oil prices equity lng offtake operated australian lng projects committed binding longterm contracts remainder sold asian spot lng market asian spot market reflects supply demand lng pacific basin directly linked crude oil prices international natural gas realizations averaged 402 per mcf 2016 compared 453 per mcf 2015 see page fs12 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2016 averaged 2594 million barrels per day onesixth company’s net oilequivalent production 2016 occurred opecmember countries angola nigeria venezuela opec quotas effect company’s net crude oil production 2016 2015 company estimates net oilequivalent production 2017 grow 4 9 percent compared 2016 assuming brent crude oil price 50 per barrel effect anticipated asset sales impact 2017 asset sales fullyear production expected range 50000 100000 barrels oilequivalent per day depending timing close individual transactions estimate subject many factors uncertainties including duration low price environment began secondhalf 2014 quotas actions may imposed opec price effects entitlement volumes changes fiscal terms restrictions scope company operations delays construction startup rampup projects fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states fs4 managements discussion analysis financial condition results operations partitioned zone saudi arabia kuwait production shutin beginning may 2015 result difficulties securing work equipment permits net oilequivalent production partitioned zone 2014 81000 barrels per day 2015 net oilequivalent production averaged 28000 barrels per day early 2017 production remains shut exact timing production restart uncertain dependent dispute resolution saudi arabia kuwait financial effects loss production 2016 significant expected significant 2017 net proved reserves consolidated companies affiliated companies totaled 111 billion barrels oilequivalent yearend 2016 slightly yearend 2015 reserve replacement ratio 2016 95 percent refer table v beginning page fs69 tabulation company’s proved net oil gas reserves geographic area beginning 2014 yearend 2014 2016 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2016 refer “results operations” section pages fs6 fs9 additional discussion company’s upstream business downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events costs materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast asia southern africa chevron operates significant ownership interests refineries areas refer “results operations” section pages fs6 fs9 additional discussion company’s downstream operations fs5 managements discussion analysis financial condition results operations consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies operating developments key operating developments events 2016 early 2017 included following upstream angola restarted lng production cargo shipments angola lng plant australia achieved startup trains 1 2 gorgon project progressed commissioning train 3 progressed commissioning testing subsea platform facilities production wells wheatstone project progressed commissioning lng train 1 common facilities received installed train 2 modules site indonesia commenced production bangka field first stage indonesia deepwater development reached agreement sell companys geothermal assets kazakhstan announced final investment decision future growth wellhead pressure management project companys 50 percentowned affiliate tengizchevroil expected increase crude oil production tengiz field 260000 barrels per day maintain production levels reservoir pressure declines philippines reached agreement sell companys geothermal assets united kingdom announced first gas alder field central north sea downstream completed sales companys marketing lubricants assets new zealand refining marketing assets hawaii common stock dividends quarterly common stock dividend increased 001 per share october 2016 making 2016 29th consecutive year company increased annual dividend payout results operations following section presents results operations variances aftertax basis company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 15 beginning page fs40 discussion company’s “reportable segments” section also read conjunction discussion “business environment outlook” pages fs2 fs6 managements discussion analysis financial condition results operations us upstream us upstream operations incurred loss 205 billion 2016 compared loss 406 billion 2015 improvement due lower depreciation expense 12 billion lower exploration expense 780 million primarily reflecting decrease impairments project cancellations also contributing improvement lower operating expenses 600 million lower tax items 190 million partially offsetting effects lower crude oil natural gas realizations 920 million us upstream operations incurred loss 406 billion 2015 compared earnings 333 billion 2014 decrease primarily due lower crude oil natural gas realizations 486 billion 570 million respectively higher depreciation expenses 219 billion higher exploration expenses 650 million increase depreciation exploration expenses primarily due impairments project cancellations lower gains asset sales also contributed decrease 2015 gains 110 million compared 700 million 2014 partially offsetting effects higher crude oil production 900 million lower operating expenses 450 million company’s average realization us crude oil natural gas liquids 2016 3500 per barrel compared 4270 2015 8413 2014 average natural gas realization 159 per thousand cubic feet 2016 compared 192 2015 390 2014 net oilequivalent production 2016 averaged 691000 barrels per day 4 percent 2015 4 percent 2014 2016 2015 production increases shale tight properties permian basin texas new mexico base business offset effect asset sales normal field declines 2015 2014 production increases due project rampups gulf mexico permian basin texas new mexico partially offset effect asset sales normal field declines net liquids component oilequivalent production 2016 averaged 504000 barrels per day 1 percent 2015 11 percent 2014 net natural gas production averaged 11 billion cubic feet per day 2016 15 percent 2015 10 percent 2014 primarily result asset sales refer “selected operating data” table page fs12 threeyear comparison production volumes united states fs7 managements discussion analysis financial condition results operations international upstream international upstream incurred loss 483 million 2016 compared earnings 209 billion 2015 decrease earnings primarily due lower crude oil realizations 189 billion lower natural gas realizations 600 million lower gains asset sales 450 million higher tax items 330 million partially offsetting decrease lower exploration operating expenses 640 million 520 million respectively higher natural gas sales volumes 330 million foreign currency effects increased earnings 122 million 2016 compared increase 725 million year earlier international upstream earnings 209 billion 2015 compared 1357 billion 2014 decrease periods primarily due lower crude oil natural gas realizations 1057 billion 880 million respectively higher depreciation expenses 111 billion primarily reflecting impairments lower gains asset sales also contributed decrease gains 370 million 2015 compared 110 billion 2014 partially offsetting decrease higher crude oil sales volumes 590 million lower operating expenses 510 million foreign currency effects increased earnings 725 million 2015 compared increase 597 million year earlier company’s average realization international crude oil natural gas liquids 2016 3861 per barrel compared 4652 2015 9042 2014 average natural gas realization 402 per thousand cubic feet 2016 compared 453 578 2015 2014 respectively international net oilequivalent production 190 million barrels per day 2016 essentially unchanged 2015 2014 2016 2015 production increases major capital projects base business shale tight properties largely offset normal field declines partitioned zone shutin impact civil unrest nigeria planned turnaround activity 2015 2014 production increases entitlement effects several locations project rampups bangladesh areas offset partitioned zone shutin normal field declines effect asset sales net liquids component international oilequivalent production 122 million barrels per day 2016 2 percent 2015 3 percent 2014 international net natural gas production 41 billion cubic feet per day 2016 4 percent 2015 5 percent 2014 refer “selected operating data” table page fs12 threeyear comparison international production volumes us downstream us downstream operations earned 131 billion 2016 compared 318 billion 2015 decrease due lower margins refined product sales 145 billion lower earnings 50 percentowned chevron phillips chemicals company llc 400 million asset impairments 110 million partially offsetting decrease lower operating expenses 80 million higher gains asset sales 110 million us downstream operations earned 318 billion 2015 compared 264 billion 2014 increase earnings due higher margins refined product sales 151 billion partially offset absence 2014 asset sale gains 960 million refined product sales 121 million barrels per day 2016 1 percent primarily due lower gas oil sales volumes refined products 123 million barrels per day 2015 increase 1 percent 2014 mainly reflecting higher sales jet fuel us branded gasoline sales 532000 barrels per day 2016 increased 2 percent 2015 3 percent 2014 refer “selected operating data” table page fs12 threeyear comparison sales volumes gasoline refined products refinery input volumes fs8 managements discussion analysis financial condition results operations international downstream international downstream earned 213 billion 2016 compared 442 billion 2015 decrease earnings primarily due absence 16 billion gain sale companys interest caltex australia limited 2015 partially offset 2016 asset sales gains 420 million lower margins refined product sales 114 billion also contributed decline partially offsetting decreases lower operating expenses 240 million foreign currency effects decreased earnings 25 million 2016 compared increase 47 million year earlier international downstream earned 442 billion 2015 compared 170 billion 2014 increase primarily due 16 billion gain sale companys interest caltex australia second quarter 2015 higher margins refined product sales 690 million foreign currency effects increased earnings 47 million 2015 compared decrease 112 million year earlier total refined product sales 146 million barrels per day 2016 3 percent 2015 excluding effects caltex australia limited divestment refined product sales 1 percent primarily reflecting lower fuel oil sales 151 million barrels per day 2015 essentially unchanged 2014 refer “selected operating data” table page fs12 threeyear comparison sales volumes gasoline refined products refinery input volumes consists worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies net charges 2016 increased 342 million 2015 mainly due higher corporate charges interest expense corporate tax items partially offset lower environmental reserve additions lower charges related reductions corporate staffs net charges 2015 decreased 935 million 2014 mainly due lower corporate tax items absence 2014 charges related mining assets partially offset higher charges related reductions corporate staffs consolidated statement income comparative amounts certain income statement categories shown sales operating revenues decreased 2016 primarily due lower refined product crude oil prices partially offset higher crude oil volumes decrease 2015 2014 primarily due lower refined product crude oil prices partially offset higher refined product crude oil volumes income equity affiliates decreased 2016 2015 primarily due lower upstreamrelated earnings tengizchevroil kazakhstan petroboscan venezuela lower downstreamrelated earnings cpchem gs caltex south korea income equity affiliates decreased 2015 2014 mainly due lower earnings tengizchevroil kazakhstan cpchem angola lng effect sale caltex australia limited second quarter 2015 partially offsetting effects higher earnings gs caltex south korea petropiar venezuela refer note 16 beginning page fs43 discussion chevron’s investments affiliated companies fs9 managements discussion analysis financial condition results operations income 16 billion 2016 included net gains asset sales 11 billion beforetax income 2015 2014 included net gains asset sales 32 billion 36 billion beforetax respectively interest income approximately 145 million 2016 119 million 2015 145 million 2014 foreign currency effects decreased income 186 million 2016 increased income 82 million 2015 277 million 2014 crude oil product purchases 2016 2015 decreased prior year periods 104 billion 499 billion respectively primarily due lower crude oil refined product prices partially offset increase crude oil volumes operating selling general administrative expenses decreased 25 billion 2016 2015 decrease included lower employee expenses 800 million transportation expenses 680 million contract labor expenses 370 million materials supplies expenses 310 million fuel expenses 310 million operating selling general administrative expenses decreased 23 billion 2015 2014 decrease included lower fuel costs 920 million also contributing decrease lower expenses construction repair maintenance 300 million contract labor 270 million research technical professional services 200 million exploration expenses 2016 decreased 2015 primarily due significantly higher 2015 charges well writeoffs largely related project cancellations lower 2016 geological geophysical expenses exploration expenses 2015 increased 2014 primarily due higher charges well writeoffs largely related project cancellations depreciation depletion amortization expenses decreased 2016 2015 primarily due lower impairments certain oil gas producing fields 30 billion 2016 compared 35 billion 2015 also contributing decrease lower production levels accretion expenses certain oil gas producing fields increase 2015 2014 primarily due impairments oil gas producing fields 35 billion 2015 compared 900 million 2014 also contributing increase higher depreciation rates higher production levels certain oil gas producing fields taxes income decreased 2016 2015 primarily due lower refined product crude oil prices divestment pakistan fuels business end june 2015 taxes income decreased 2015 2014 primarily due lower crude oil refined product prices decline income tax expense 2016 186 billion consistent decline total income beforetax company 700 billion us losses tax increased loss 288 billion 2015 loss 432 billion 2016 144 billion increase losses primarily driven effect lower crude oil prices increase losses direct impact company’s us income tax benefit resulting increase 624 million yearoveryear periods tax benefit 169 billion 2015 tax benefit 232 billion 2016 international income tax reduced calendar years 772 billion 2015 216 billion 2016 556 billion decline fs10 managements discussion analysis financial condition results operations also primarily driven effect lower crude oil prices effect drove 124 billion reduction international income tax expense yearoveryear periods 183 billion 2015 588 million 2016 refer also discussion effective income tax rate note 19 page fs49 decline income tax expense 2015 1176 billion consistent decline total income tax company 2636 billion us income tax reduced 629 billion 2014 loss 288 billion 2015 917 billion reduction primarily driven effect lower crude oil prices lower earnings direct impact company’s us income tax expense resulting reduction 414 billion yearoveryear periods tax expense 245 billion 2014 tax benefit 169 billion 2015 international income tax reduced calendar years 2491 billion 2014 772 billion 2015 1719 billion decline also primarily driven effect lower crude oil prices shut production partitioned zone effects drove 762 billion reduction international income tax expense yearoveryear periods 944 billion 2014 182 billion 2015 addition income tax benefit decrease statutory tax rates united kingdom 2015 refer also discussion effective income tax rate note 19 page fs49 fs11 managements discussion analysis financial condition results operations selected operating data12 fs12 managements discussion analysis financial condition results operations liquidity capital resources sources uses cash lower crude oil price environment began secondhalf 2014 continued 2016 significantly reduced company’s cash flows operations company responded reductions capital exploratory expenditures reductions cost structure increased asset sales progress actions 2016 included • reducing capital expenditures 181 billion 39 percent decrease compared 2015 • reducing operating administrative expenses 25 billion 9 percent decrease compared 2015 • realizing net proceeds asset sales 28 billion 2016 additional transactions expected close 2017 strength company’s balance sheet enabled meet remaining cash outflows additional borrowing cash equivalents marketable securities total balances 70 billion 113 billion december 31 2016 2015 respectively cash provided operating activities 2016 128 billion compared 195 billion 2015 315 billion 2014 reflecting lower crude oil prices cash provided operating activities net contributions employee pension plans approximately 09 billion 2016 2015 04 billion 2014 cash provided investing activities included proceeds deposits related asset sales 28 billion 2016 57 billion 2015 57 billion 2014 restricted cash 14 billion 11 billion december 31 2016 2015 respectively held cash shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet amounts generally associated upstream abandonment activities tax payments funds held escrow taxdeferred exchanges refundable deposits related pending asset sales dividends paid common stockholders 80 billion 2016 80 billion 2015 79 billion 2014 october 2016 company increased quarterly dividend 001 per common share debt capital lease obligations total debt capital lease obligations 461 billion december 31 2016 385 billion yearend 2015 76 billion increase total debt capital lease obligations 2016 primarily due funding company’s capital investment program included several large projects construction phase company completed bond issuance 68 billion may 2016 company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 198 billion december 31 2016 compared 129 billion yearend 2015 amounts 90 billion 80 billion reclassified longterm debt end 2016 2015 respectively yearend 2016 settlement obligations expected require use working capital 2017 company intent ability evidenced committed credit facilities refinance longterm basis fs13 managements discussion analysis financial condition results operations chevron automatic shelf registration statement expires august 2018 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation texaco capital inc securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa2 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements extended periods low prices crude oil natural gas narrow margins refined products commodity chemicals company also modify capital spending plans provide flexibility continue paying common stock dividend also remain committed retaining company’s highquality debt ratings committed credit facilities information related committed credit facilities included note 20 shortterm debt page fs52 common stock repurchase program july 2010 board directors approved ongoing share repurchase program set term monetary limits company acquire shares program 2016 2015 inception program 2014 company purchased 1809 million shares 200 billion capital exploratory expenditures capital exploratory expenditures business segment 2016 2015 2014 follows total expenditures 2016 224 billion including 38 billion company’s share equityaffiliate expenditures require cash outlays company 2015 2014 expenditures 340 billion 403 billion respectively including company’s share affiliates’ expenditures 34 billion 35 billion respectively fs14 managements discussion analysis financial condition results operations 224 billion expenditures 2016 90 percent 201 billion related upstream activities approximately 92 percent expended upstream operations 2015 2014 international upstream accounted 77 percent worldwide upstream investment 2016 76 percent 2015 2014 company estimates 2017 capital exploratory expenditures 198 billion including 47 billion spending affiliates planned reduction compared 2016 expenditures reflects current crude oil market conditions major capital projects nearing completion targeting shortercycle projects approximately 87 percent total 173 billion budgeted exploration production activities approximately 85 billion planned upstream capital spending relates base producing assets including 25 billion shale tight resource investments majority slated permian basin developments texas new mexico another 7 billion related major capital projects already underway including approximately 2 billion completion gorgon wheatstone lng projects australia 3 billion affiliate expenditures associated future growth wellhead pressure management project tengiz field kazakhstan global exploration funding accounts approximately 1 billion remainder primarily related early stage projects supporting potential future development opportunities company continue monitor crude oil market conditions restrict capital outlays oil price conditions deteriorate worldwide downstream spending 2017 estimated 22 billion 16 billion projects united states investments technology companies corporate businesses 2017 budgeted 03 billion noncontrolling interests company noncontrolling interests 12 billion december 31 2016 december 31 2015 distributions noncontrolling interests totaled 63 million 128 million 2016 2015 respectively pension obligations information related pension plan contributions included page fs56 note 24 employee benefit plans heading “cash contributions benefit payments” financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2016 book value inventory lower replacement costs based average acquisition costs year approximately 29 billion interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2016 lower 2015 2014 due lower income debt ratio total debt percentage total debt plus chevron corporation stockholders equity indicates company’s leverage companys debt ratio 2016 higher 2015 2014 company took debt finance ongoing investment program offbalancesheet arrangements contractual obligations guarantees contingencies longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2017 15 billion 2018 16 billion 2019 14 billion 2020 11 billion 2021 09 billion 2022 26 billion portion commitments may ultimately shared project partners total payments agreements approximately 13 billion 2016 19 billion 2015 37 billion 2014 fs15 managements discussion analysis financial condition results operations following table summarizes company’s significant contractual obligations excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 24 beginning page fs56 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect consolidated financial position liquidity single period 90 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20182019 period amounts represent principal balance include commodity purchase obligations fixed determinable obligations generally monetized relatively short period time sales transactions similar agreements third parties examples include obligations purchase lng regasified natural gas refinery products indexed prices direct guarantees company two guarantees equity affiliates totaling 116 billion amount 749 million associated financing arrangement equity affiliate approximate 5year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 408 million associated certain payments terminal use agreement entered equity affiliate approximate 11year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications information related indemnifications included page fs61 note 25 contingencies commitments heading “indemnifications” financial derivative instrument market risk market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2016 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2016 company’s market exposure positions monitored daily basis internal risk control group accordance company’s risk management policies companys risk management practices compliance policies reviewed audit committee company’s board directors derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally fs16 managements discussion analysis financial condition results operations published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2016 material companys results operations company uses monte carlo simulation method valueatrisk var model estimate maximum potential loss fair value 95 confidence level oneday holding period effect adverse changes market conditions derivative commodity instruments held issued based inputs var companys primary risk exposures area derivative commodity instruments december 31 2016 2015 material companys cash flows results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2016 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2016 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer “other information” page fs44 note 16 investments advances discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe information related methyl tertiary butyl ether mtbe matters included page fs45 note 18 heading “mtbe” ecuador information related ecuador matters included note 18 heading “ecuador” beginning page fs45 environmental following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws company records asset retirement obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 142 billion asset retirement obligations yearend 2016 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer discussion additional information environmental matters impact chevron companys 2016 environmental expenditures refer note 25 page fs61 additional discussion environmental remediation provisions yearend reserves refer also note 26 page fs62 additional discussion companys asset retirement obligations suspended wells information related suspended wells included note 22 accounting suspended exploratory wells beginning page fs54 fs17 managements discussion analysis financial condition results operations income taxes information related income tax contingencies included pages fs49 fs51 note 19 page fs61 note 25 heading “income taxes” contingencies information related contingencies included page fs62 note 25 consolidated financial statements heading “other contingencies” environmental matters company subject various international federal state local environmental health safety laws regulations marketbased programs laws regulations programs continue evolve expected increase number complexity time govern manner company conducts operations also products sells example international agreements eg paris agreement kyoto protocol national eg carbon tax capandtrade efficiency standards regional state legislation eg californias ab32 sb32 low carbon fuel standards regulatory measures eg us environmental protection agencys methane performance standards aim limit reduce greenhouse gas ghg emissions currently various stages implementation consideration ghg issues responses issues international agreements national regional state legislation regulation integrated company’s strategy planning capital investment reviews applicable also factored company’s longrange supply demand energy price forecasts reflect longrange effects renewable fuel penetration energy efficiency standards climaterelated policy actions demand response oil natural gas prices addition legislation regulations intended address hydraulic fracturing also continue evolve international national state levels refer “risk factors” part item 1a pages 20 22 discussion inherent risks increasingly restrictive environmental regulation could materially impact company’s results operations financial condition costs complying existing laws regulations pertaining company operations products embedded normal costs business however possible predict certainty amount additional investments new existing technology facilities amounts increased operating costs incurred future prevent control reduce eliminate releases hazardous materials environment remediate restore areas damaged prior releases nitrogen oxide sulfur oxide hazardous materials comply new environmental laws regulations although costs may significant results operations single period company presently expect material adverse effect companys liquidity financial position accidental leaks spills requiring cleanup may occur ordinary course business company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2016 approximately 21 billion consolidated companies included expenditures approximately 05 billion environmental capital expenditures 16 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2017 total worldwide environmental capital expenditures estimated 04 billion capital costs addition ongoing costs complying environmental regulations costs remediate previously contaminated sites critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known fs18 managements discussion analysis financial condition results operations discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows oil gas reserves crude oil natural gas reserves estimates future production impact certain asset expense accounts included consolidated financial statements proved reserves estimated quantities oil gas geoscience engineering data demonstrate reasonable certainty economically producible future existing economic conditions operating methods government regulations proved reserves include developed undeveloped volumes proved developed reserves represent volumes expected recovered existing wells existing equipment operating methods proved undeveloped reserves volumes expected recovered new wells undrilled proved acreage existing wells relatively major expenditure required recompletion variables impacting chevrons estimated volumes crude oil natural gas reserves include field performance available technology commodity prices development production costs estimates crude oil natural gas reserves important timing expense recognition costs incurred valuation certain oil gas producing assets impacts oil gas reserves chevrons consolidated financial statements using successful efforts method accounting include following 1 amortization capitalized exploratory drilling development costs depreciated unitofproduction uop basis using proved developed reserves acquisition costs proved properties amortized uop basis using total proved reserves 2016 chevrons uop depreciation depletion amortization dda oil gas properties 133 billion proved developed reserves beginning 2016 54 billion barrels consolidated companies estimates proved reserves used uop calculations consolidated operations lower 5 percent across oil gas properties uop dda 2016 would increased approximately 700 million 2 impairment oil gas reserves used assessing oil gas producing properties impairment significant reduction estimated reserves property would trigger impairment review proved reserves cases portion unproved resources used estimate future production volumes cash flow model discussion estimates assumptions used impairment assessments see impairment properties plant equipment investments affiliates refer table v “reserve quantity information” beginning page fs69 changes proved reserve estimates three years ending december 31 2016 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs75 estimates proved reserve values three years ended december 31 2016 oil gas reserves commentary read conjunction properties plant equipment section note 1 beginning page fs30 includes description “successful efforts” method accounting oil gas exploration production activities impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions generally consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 17 page fs44 section properties plant equipment note 1 summary significant accounting policies beginning page fs30 fs19 managements discussion analysis financial condition results operations company routinely performs impairment reviews triggering events arise determine whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable similarly significant downward revision companys crude oil natural gas price outlook would trigger impairment reviews impacted upstream assets addition impairments could occur due changes national state local environmental regulations laws including designed stop impede development production oil gas also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value occurs determination must made whether loss otherthantemporary case investment impaired number differing assumptions potentially affecting whether investment impaired period amount impairment sensitivity analysis practicable company reported impairments certain oil gas properties 2016 due reservoir performance lower crude oil prices company reported impairments certain oil gas properties 2015 primarily result downward revisions companys longerterm crude oil price outlook impairments years 2016 2015 primarily brazil united states material individual impairments ppe investments recorded year 2014 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired resulted larger impacts impaired assets asset retirement obligations determination fair value asset retirement obligation aro company uses various assumptions judgments including factors existence legal obligation estimated amounts timing settlements discount inflation rates expected impact advances technology process improvements sensitivity analysis aro impact earnings 2016 practicable given broad range companys longlived assets number assumptions involved estimates favorable changes assumptions would reduced estimated future obligations thereby lowering accretion expense amortization costs whereas unfavorable changes would opposite effect refer note 26 page fs62 additional discussions asset retirement obligations pension postretirement benefit plans note 24 beginning page fs56 includes information funded status company’s pension postretirement benefit opeb plans reflected consolidated balance sheet components pension opeb expense reflected consolidated statement income related underlying assumptions determination pension plan expense obligations based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations critical assumptions determining expense obligations opeb plans provide certain health care life insurance benefits qualifying retired employees funded discount rate assumed health care costtrend rates information related company’s processes develop assumptions included page fs58 note 24 relevant headings actual rates may vary significantly estimates unanticipated changes worlds financial markets 2016 company used expected longterm rate return 725 percent discount rate service costs 44 percent discount rate interest cost 30 percent us pension plans actual return 2016 95 percent 10 years ending december 31 2016 actual asset returns averaged 45 percent plan additionally exception three years within 10year period actual asset returns plan equaled exceeded 725 percent year fs20 managements discussion analysis financial condition results operations total pension expense 2016 12 billion increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa indication sensitivity pension expense longterm rate return assumption 1 percent increase assumption company’s primary us pension plan accounted 67 percent companywide pension expense would reduced total pension plan expense 2016 approximately 86 million 1 percent increase discount rates plan would reduced pension expense 2016 approximately 297 million aggregate funded status recognized december 31 2016 net liability approximately 47 billion increase discount rate would decrease pension obligation thus changing funded status plan december 31 2016 company used discount rate 39 percent measure obligations us pension plans indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan accounted 62 percent companywide pension obligation would reduced plan obligation approximately 390 million would decreased plan’s underfunded status approximately 20 billion 16 billion company’s opeb plans expense 2016 221 million total liability unfunded end 2016 25 billion main us opeb plan company used discount rate service cost 49 percent discount rate interest cost 36 percent measure expense 2016 41 percent discount rate measure benefit obligations december 31 2016 discount rate changes similar used pension sensitivity analysis resulted immaterial impact 2016 opeb expense opeb liabilities end 2016 information sensitivity health care costtrend rate refer page fs59 note 24 heading “other benefit assumptions” differences various assumptions used determine expense funded status plan actual experience included actuarial gainloss refer page fs57 note 24 description method used amortize 57 billion beforetax actuarial losses recorded company december 31 2016 estimate costs recognized expense 2017 addition information related company contributions included page fs60 note 24 heading “cash contributions benefit payments” contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 25 beginning page fs61 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2016 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards refer note 5 beginning page fs34 information regarding new accounting standards fs21 quarterly results stock market data unaudited fs22 fs23 fs24 consolidated statement income millions dollars except pershare amounts fs25 consolidated statement comprehensive income millions dollars fs26 consolidated balance sheet millions dollars except pershare amount fs27 consolidated statement cash flows millions dollars fs28 consolidated statement equity shares thousands amounts millions dollars fs29 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments affiliates assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values fair value measurements three levels fair value hierarchy inputs company uses measure fair value asset liability follows level 1 inputs quoted prices active markets identical assets liabilities level 2 inputs quoted prices included within level 1 directly indirectly observable asset liability level 3 inputs observable market derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending fs30 notes consolidated financial statements millions dollars except pershare amounts determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 22 beginning page fs54 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset including changes commodity price forecast significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net cash flows proved crude oil natural gas properties company performs impairment reviews country concession psc development area field basis appropriate downstream impairment reviews performed basis refinery plant marketinglubricants area distribution area appropriate impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 10 beginning page fs37 relating fair value measurements fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 26 page fs62 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount effective quarter ended december 31 2016 company elected move annual review goodwill balance third fourth quarter better align preparation review companys business plan used test change delay accelerate avoid impairment charge environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated crude oil natural gas mineralproducing properties liability aro made accordance accounting standards asset retirement environmental obligations refer note 26 page fs62 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated fs31 notes consolidated financial statements millions dollars except pershare amounts regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized using entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs25 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation certain employees equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant beginning 2017 stock options stock appreciation rights granted company’s longterm incentive plan graded vesting one third award vests annually january 31 first anniversary grant date standard restricted stock units cliff vesting total award vest january 31 fifth anniversary grant date company amortizes awards straightline basis note 2 changes accumulated comprehensive losses change accumulated comprehensive losses aocl presented consolidated balance sheet impact significant amounts reclassified aocl information presented consolidated statement income year ending december 31 2016 reflected table amounts net tax refer note 24 beginning page fs56 reclassified components totaling 937 included employee benefit costs year ending december 31 2016 related income taxes period totaling 333 reflected income tax expense consolidated statement income reclassified amounts insignificant fs32 notes consolidated financial statements millions dollars except pershare amounts note 3 noncontrolling interests ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income loss attributable chevron corporation” activity equity attributable noncontrolling interests 2016 2015 2014 follows note 4 information relating consolidated statement cash flows loan tengizchevroil llp development future growth wellhead pressure management project represents majority net borrowing repayment loans equity affiliates “net sales treasury shares” represents cost common shares acquired less cost shares issued sharebased compensation plans purchases totaled 2 5006 2016 2015 2014 respectively purchases fs33 notes consolidated financial statements millions dollars except pershare amounts made companys share repurchase program 2016 2015 2014 company purchased 415 million common shares 5000 share repurchase program 2016 2015 2014 “net sales purchases shortterm investments” generally consisted restricted cash associated upstream abandonment activities tax payments certain pension fund payments invested cash shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet consolidated statement cash flows excludes changes consolidated balance sheet affect cash depreciation depletion amortization deferred income tax provision collectively include approximately 2800 noncash reductions properties plant equipment recorded 2016 relating impairments noncash charges due reservoir performance lower crude prices refer also note 26 page fs62 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2016 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table excludes noncash additions 56 2016 1362 2015 2310 2014 note 5 new accounting standards revenue recognition topic 606 revenue contracts customers july 2015 fasb approved oneyear deferral effective date asu 201409 becomes effective company january 1 2018 standard provides single comprehensive revenue recognition model contracts customers eliminates industryspecific revenue recognition guidance expands disclosure requirements company elected adopt standard using modified retrospective transition method sales operating revenues” consolidated statement income includes excise valueadded similar taxes sales transactions upon adoption standard revenue exclude salesbased taxes collected behalf third parties impact earnings companys implementation efforts focused accounting policy disclosure updates system enhancements necessary meet standards requirements company continues evaluate effect standard consolidated financial statements interest imputation interest topic 835 simplifying presentation debt issuance costs effective january 1 2016 chevron adopted asu 201503 retrospective basis standard requires debt issuance costs related recognized liability presented balance sheet direct deduction carrying amount debt liability effects retrospective adoption december 31 2015 consolidated balance sheet reductions 43 deferred charges assets 1 shortterm debt 42 longterm debt leases topic 842 february 2016 fasb issued asu 201602 becomes effective company january 1 2019 standard requires lessees present rightofuse assets lease liabilities balance sheet company evaluating effect standard company’s consolidated financial statements compensationstock compensation topic 718 improvements employee sharebased payment accounting march 2016 fasb issued asu 201609 company elected earlyadopt retrospective january 1 2016 standard requires excess tax benefits tax deficiencies recognized income tax expense benefit income statement regardless whether benefit reduces taxes payable current period addition excess tax fs34 notes consolidated financial statements millions dollars except pershare amounts benefits classified along income tax cash flows operating activity statement cash flows effect early adoption material companys consolidated financial statements financial instruments credit losses topic 326 june 2016 fasb issued asu 201613 becomes effective company beginning january 1 2020 standard requires companies use forwardlooking information calculate credit loss estimates company evaluating effect standard company’s consolidated financial statements intangibles goodwill topic 350 january 2017 fasb issued asu 201704 standard simplifies accounting goodwill impairment company chosen early adopt beginning january 1 2017 early adoption effect companys consolidated financial statements note 6 lease commitments certain noncancellable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve crude oil production processing equipment service stations bareboat charters office buildings facilities leases classified operating leases capitalized payments operating leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2016 2015 2014 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2016 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows fs35 notes consolidated financial statements millions dollars except pershare amounts note 7 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method summarized financial information cusa consolidated subsidiaries follows note 8 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 16 beginning page fs43 discussion tco operations summarized financial information 100 percent tco presented table note 9 summarized financial data chevron phillips chemical company llc chevron 50 percent equity ownership interest chevron phillips chemical company llc cpchem refer note 16 beginning page fs43 discussion cpchem operations summarized financial information 100 percent cpchem presented table fs36 notes consolidated financial statements millions dollars except pershare amounts note 10 fair value measurements tables next page show fair value hierarchy assets liabilities measured fair value recurring nonrecurring basis december 31 2016 december 31 2015 marketable securities company calculates fair value marketable securities based quoted market prices identical assets fair values reflect cash would received instruments sold december 31 2016 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value offsetting amount consolidated statement income derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information properties plant equipment company reported impairments certain oil gas properties 2016 primarily due reservoir performance lower crude oil prices company reported impairments certain oil gas properties 2015 primarily result downward revisions companys longerterm crude oil price outlook impairments 2016 2015 primarily brazil united states investments advances company material investments advances measured fair value nonrecurring basis report 2016 2015 assets liabilities measured fair value recurring basis assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 6988 fs37 notes consolidated financial statements millions dollars except pershare amounts 11022 december 31 2016 december 31 2015 respectively fair values cash equivalents classified level 1 reflect cash would received instruments settled december 31 2016 cash equivalents” include investments carryingfair value 1426 1100 december 31 2016 december 31 2015 respectively december 31 2016 investments classified level 1 include restricted funds related certain upstream abandonment activities tax payments funds held escrow taxdeferred exchanges refundable deposits related pending asset sales reported “deferred charges assets” consolidated balance sheet longterm debt 26193 25542 december 31 2016 december 31 2015 estimated fair values 26627 25884 respectively longterm debt primarily includes corporate issued bonds fair value corporate bonds 25860 classified level 1 fair value longterm debt 767 classified level 2 carrying values shortterm financial assets liabilities consolidated balance sheet approximate fair values fair value remeasurements financial instruments december 31 2016 2015 material note 11 financial derivative instruments derivative commodity instruments company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses derivative commodity instruments traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition company enters swap contracts option contracts principally major financial institutions oil gas companies “overthecounter” markets governed international swaps derivatives association agreements master netting arrangements depending nature derivative transactions bilateral collateral arrangements may also required derivative instruments measured fair value december 31 2016 december 31 2015 december 31 2014 classification consolidated balance sheet consolidated statement income consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments table following page represents gross net derivative assets liabilities subject netting agreements consolidated balance sheet december 31 2016 december 31 2015 fs38 notes consolidated financial statements millions dollars except pershare amounts consolidated balance sheet effect netting derivative assets liabilities derivative assets liabilities classified consolidated balance sheet accounts notes receivable longterm receivables accounts payable deferred credits noncurrent obligations amounts offset consolidated balance sheet represent positions meet conditions right offset concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings company investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient alternative risk mitigation measures may deployed including requiring prepayments letters credit acceptable collateral instruments support sales customers note 12 assets held sale december 31 2016 company classified 4119 net properties plant equipment “assets held sale” consolidated balance sheet assets associated upstream operations anticipated sold next 12 months revenues earnings contributions assets 2016 material note 13 equity retained earnings december 31 2016 2015 included approximately 16479 15010 respectively company’s share undistributed earnings equity affiliates december 31 2016 87 million shares chevron’s common stock remained available issuance 260 million shares reserved issuance chevron longterm incentive plan addition 859746 shares remain available issuance 1600000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 14 earnings per share basic earnings per share eps based upon “net income loss attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 23 “stock options sharebased compensation” beginning page fs55 table following page sets forth computation basic diluted eps fs39 notes consolidated financial statements millions dollars except pershare amounts note 15 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids plant downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities technology companies company’s segments managed “segment managers” report “chief operating decision maker” codm segments represent components company engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available company’s primary country operation united states america country domicile components company’s operations reported international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented table following page fs40 notes consolidated financial statements millions dollars except pershare amounts segment assets segment assets include intercompany investments receivables assets yearend 2016 2015 follows 1 2015 adjusted conform asu 201517 refer note 19 income taxes beginning page fs49 2 2015 adjusted conform asu 201503 refer note 5 new accounting standards page fs34 segment sales operating revenues operating segment sales operating revenues including internal transfers years 2016 2015 2014 presented table next page products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale fuel lubricant additives transportation trading refined products crude oil activities include revenues insurance operations real estate activities technology companies fs41 notes consolidated financial statements millions dollars except pershare amounts segment income taxes segment income tax expense years 2016 2015 2014 follows segment information additional information segmentation major equity affiliates contained note 16 page fs43 information related properties plant equipment segment contained note 17 page fs44 fs42 notes consolidated financial statements millions dollars except pershare amounts note 16 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco operates tengiz korolev crude oil fields kazakhstan december 31 2016 company’s carrying value investment tco 140 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets july 2016 company made 2000 longterm loan tco fund development future growth wellhead pressure management project see note 8 page fs36 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company operates hamaca heavyoil production upgrading project venezuela’s orinoco belt december 31 2016 company’s carrying value investment petropiar approximately 150 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company investments advances totaling 1245 includes longterm loans 921 yearend 2016 loans provided fund 30 percent initial pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 392 percent interest petroboscan joint stock company operates boscan field venezuela december 31 2016 company’s carrying value investment petroboscan approximately 120 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets company also outstanding longterm loan petroboscan 626 yearend 2016 fs43 notes consolidated financial statements millions dollars except pershare amounts angola lng limited chevron 364 percent interest angola lng limited processes liquefies natural gas produced angola delivery international markets gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs energy joint venture imports refines markets petroleum products petrochemicals lubricants predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned phillips 66 information “sales operating revenues” consolidated statement income includes 5786 4850 10404 affiliated companies 2016 2015 2014 respectively “purchased crude oil products” includes 3468 4240 6735 affiliated companies 2016 2015 2014 respectively “accounts notes receivable” consolidated balance sheet includes 676 399 due affiliated companies december 31 2016 2015 respectively “accounts payable” includes 383 286 due affiliated companies december 31 2016 2015 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevrons net loans affiliates 3535 410 874 december 31 2016 2015 2014 respectively note 17 properties plant equipment1 united states australia nigeria country accounted 10 percent company’s net properties plant equipment ppe 2016 australia ppe 53962 49205 41012 2016 2015 2014 respectively nigeria ppe 17922 18773 19214 2016 2015 2014 respectively net dry hole expense related prior years’ expenditures 175 1573 371 2016 2015 2014 respectively depreciation expense includes accretion expense 749 715 882 2016 2015 2014 respectively impairments 3186 4066 1274 2016 2015 2014 respectively fs44 notes consolidated financial statements millions dollars except pershare amounts note 18 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party six pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable company longer uses mtbe manufacture gasoline united states ecuador background chevron defendant civil lawsuit initiated superior court nueva loja lago agrio ecuador may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations lago agrio judgment 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remained unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment fs45 notes consolidated financial statements millions dollars except pershare amounts february 14 2011 provincial court lago agrio rendered adverse judgment case court rejected chevron’s defenses extent court addressed opinion judgment assessed approximately 8600 damages approximately 900 award plaintiffs’ representatives also assessed additional amount approximately 8600 punitive damages unless company issued public apology within 15 days judgment chevron february 17 2011 plaintiffs appealed judgment seeking increased damages march 11 2011 chevron appealed judgment seeking judgment nullified january 3 2012 appellate panel provincial court affirmed february 14 2011 decision ordered chevron pay additional attorneys’ fees amount “010 values derived decisional act judgment” plaintiffs filed petition clarify amplify appellate decision january 6 2012 court issued ruling response january 13 2012 purporting clarify amplify january 3 2012 ruling included clarification deadline company issue public apology avoid additional amount approximately 8600 punitive damages within 15 days clarification ruling february 3 2012 chevron issue apology might mischaracterized admission liability would contrary facts evidence submitted trial january 20 2012 chevron appealed called petition cassation appellate panel’s decision ecuador’s national court justice part appeal chevron requested suspension requirement chevron post bond prevent enforcement ecuadorian law judgment cassation appeal february 17 2012 appellate panel provincial court admitted chevron’s cassation appeal procedural step necessary national court justice hear appeal provincial court appellate panel denied chevron’s request suspension requirement chevron post bond stated would comply first second interim awards international arbitration tribunal discussed march 29 2012 matter transferred provincial court national court justice november 22 2012 national court agreed hear chevrons cassation appeal august 3 2012 provincial court lago agrio approved courtappointed liquidator’s report damages calculated total judgment case 19100 november 13 2013 national court ratified judgment nullified 8600 punitive damage assessment resulting judgment 9500 december 23 2013 chevron appealed decision ecuador constitutional court ecuadors highest court reporting justice constitutional court heard oral arguments appeal july 16 2015 july 2 2013 provincial court lago agrio issued embargo order ecuador ordering funds paid government ecuador chevron satisfy 96 award issued unrelated action arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law must paid lago agrio plaintiffs award issued tribunal united statesecuador bilateral investment treaty action filed 2006 connection seven breach contract cases texpet filed government ecuador 1991 1993 government ecuador moved set aside tribunals award september 26 2014 supreme court netherlands issued opinion denying ecuador’s set aside request federal district court district columbia confirmed tribunals award august 4 2015 panel us court appeals district columbia circuit affirmed district courts decision september 28 2015 court appeals denied government ecuadors request full appellate court review federal district courts decision june 6 2016 united states supreme court denied government ecuadors petition writ certiorari july 22 2016 government ecuador paid 96 award plus interest resulting payment chevron approximately 113 lago agrio plaintiffs enforcement actions chevron assets ecuador lago agrio plaintiffs lawyers stated press releases media seek enforce ecuadorian judgment various countries otherwise disrupt chevrons operations may 30 2012 lago agrio plaintiffs filed action chevron corporation chevron canada limited chevron canada finance limited ontario superior court justice ontario canada seeking recognize enforce ecuadorian judgment may 1 2013 ontario superior court justice held court jurisdiction chevron canada limited purposes action stayed action due absence evidence chevron corporation assets ontario lago agrio plaintiffs appealed decision december 17 2013 court appeals ontario affirmed lower court’s decision jurisdiction set aside stay allowing recognition enforcement action heard ontario superior court justice chevron appealed decision supreme court canada september 4 2015 supreme court dismissed appeal affirmed ontario superior court justice jurisdiction chevron canada limited purposes action recognition enforcement proceeding related preliminary motions proceeding ontario superior court justice january 20 2017 ontario superior court justice granted chevron canada limited’s chevron corporation’s motions summary judgment concluding two companies separate legal entities separate rights fs46 notes consolidated financial statements millions dollars except pershare amounts obligations result superior court dismissed recognition enforcement claim chevron canada limited chevron corporation still remains defendant action february 3 2017 lago agrio plaintiffs appealed superior courts january 20 2017 decision june 27 2012 lago agrio plaintiffs filed complaint chevron corporation superior court justice brasilia brazil seeking recognize enforce ecuadorian judgment chevron answered complaint accordance brazilian procedure matter referred public prosecutor nonbinding opinion issues raised complaint may 13 2015 public prosecutor issued nonbinding opinion recommended superior court justice reject plaintiffs recognition enforcement request finding among things lago agrio judgment procured fraud corruption cannot recognized brazil violates brazilian international public order october 15 2012 provincial court lago agrio issued ex parte embargo order purports order seizure assets belonging separate chevron subsidiaries ecuador argentina colombia november 6 2012 request lago agrio plaintiffs court argentina issued freeze order chevron argentina srl another chevron subsidiary ingeniero norberto priu requiring shares companies embargoed requiring third parties withhold 40 percent payments due chevron argentina srl ordering banks withhold 40 percent funds chevron argentina srl bank accounts december 14 2012 argentinean court rejected motion revoke freeze order modified ordering third parties required withhold funds must report payments court also clarified freeze order relating bank accounts excludes taxes january 30 2013 appellate court upheld freeze order june 4 2013 supreme court argentina revoked freeze order entirety december 12 2013 lago agrio plaintiffs served chevron notice filing enforcement proceeding national court first instance argentina chevron filed answer february 27 2014 lago agrio plaintiffs responded december 29 2015 april 19 2016 public prosecutor argentina issued nonbinding opinion recommending national court first instance argentina reject lago agrio plaintiffs request recognize ecuadorian judgment argentina chevron continues believe provincial court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron cannot predict timing ultimate outcome appeals process ecuador enforcement action chevron expects continue vigorous defense imposition liability ecuadorian courts contest defend enforcement actions companys bilateral investment treaty arbitration claims chevron texpet filed arbitration claim september 2009 republic ecuador arbitral tribunal presiding permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 tribunal issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal january 25 2012 tribunal converted order interim measures interim award chevron filed renewed application interim measures january 4 2012 republic ecuador opposed chevron’s application requested existing order interim measures vacated january 9 2012 february 16 2012 tribunal issued second interim award mandating republic ecuador take measures necessary whether judicial legislative executive branches suspend cause suspended enforcement recognition within without ecuador judgment chevron particular preclude certification republic ecuador would cause judgment enforceable chevron february 27 2012 tribunal issued third interim award confirming jurisdiction hear chevrons arbitration claims february 7 2013 tribunal issued fourth interim award declared republic ecuador “has violated first second interim awards bit uncitral rules international law regard finalization enforcement subject execution lago agrio judgment within outside ecuador including limited canada brazil argentina” republic ecuador subsequently filed district court hague request set aside tribunal’s interim awards first partial award described january 20 2016 district court denied republics request april 13 2016 republic ecuador appealed decision fs47 notes consolidated financial statements millions dollars except pershare amounts tribunal divided merits phase proceeding three phases september 17 2013 tribunal issued first partial award phase one finding settlement agreements republic ecuador texpet applied texpet chevron released texpet chevron claims based collective diffuse rights arising texpets operations former concession area precluded third parties asserting collectivediffuse rights environmental claims relating texpets operations former concession area preclude individual claims personal harm tribunal held hearing april 2930 2014 address remaining issues relating phase one march 12 2015 issued nonbinding decision lago agrio plaintiffs complaint face includes claims barred settlement agreement republic ecuador texpet decision tribunal deferred phase two remaining issues phase one including whether republic ecuador breached 1995 settlement agreement remedies available chevron texpet result breach phase two issues addressed hearing held april may 2015 tribunal set date phase three damages phase arbitration companys rico action series us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable march 7 2011 federal district court issued preliminary injunction prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case pending resolution chevron’s civil lawsuit federal district court may 31 2011 federal district court severed claims one eight chevron’s complaint ninth claim declaratory relief imposed discovery stay claims one eight pending trial ninth claim declaratory relief september 19 2011 us court appeals second circuit vacated preliminary injunction stayed trial chevron’s ninth claim declaratory relief set november 14 2011 denied defendants’ mandamus petition recuse judge hearing lawsuit second circuit issued opinion january 26 2012 ordering dismissal chevron’s ninth claim declaratory relief february 16 2012 federal district court lifted stay claims one eight october 18 2012 federal district court set trial date october 15 2013 march 22 2013 chevron settled claims stratus consulting april 12 2013 sworn declarations representatives stratus consulting filed court admitting role plaintiffs attorneys drafting environmental report mining engineer appointed provincial court lago agrio september 26 2013 second circuit denied defendants petition writ mandamus recuse judge hearing case collaterally estop chevron seeking declaration lago agrio judgment obtained fraud unlawful conduct trial commenced october 15 2013 concluded november 22 2013 march 4 2014 federal district court entered judgment favor chevron prohibiting defendants seeking enforce lago agrio judgment united states prohibiting profiting illegal acts defendants appealed federal district courts decision april 20 2015 panel us court appeals second circuit heard oral arguments august 8 2016 second circuit issued unanimous opinion affirming full judgment federal district court favor chevron october 27 2016 second circuit denied defendants petitions en banc rehearing opinion appeal managements assessment ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated ecuadorian judgment 2008 engineer’s report alleged damages september 2010 plaintiffs’ submission alleged damages management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss fs48 notes consolidated financial statements millions dollars except pershare amounts note 19 taxes reconciliation us statutory federal income tax rate company’s effective income tax rate detailed following table 1 2014 2015 conformed 2016 presentation 2 includes onetime tax benefits associated changes uncertain tax positions valuation allowances 2016 decline income tax expense 1861 expense 132 2015 benefit 1729 2016 result yearoveryear reduction total income tax expense primarily due effects lower crude oil prices company’s effective tax rate changed 27 percent 2015 80 percent 2016 change effective tax rate primarily consequence mix effect resulting absolute level earnings losses whether arose higher lower tax rate jurisdictions fs49 notes consolidated financial statements millions dollars except pershare amounts company records deferred taxes taxjurisdiction basis reported deferred tax balances composed following deferred tax liabilities end 2016 essentially unchanged yearend 2015 deferred tax assets increased approximately 3700 2016 increase primarily related increased tax loss carryforwards overall valuation allowance relates deferred tax assets us foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized end 2016 company tax loss carryforwards approximately 16538 tax credit carryforwards approximately 1423 primarily related various international tax jurisdictions whereas tax loss carryforwards expiration date others expire various times 2017 2036 us foreign tax credit carryforwards 10976 expire 2017 2026 december 31 2016 2015 deferred taxes classified consolidated balance sheet follows effective january 1 2016 chevron earlyadopted income taxes topic 740 balance sheet classification deferred taxes asu 201517 retrospective basis standard provides deferred income taxes classified noncurrent consolidated balance sheet prior requirement classify deferred tax assets liabilities based classification underlying asset liability december 31 2015 consolidated balance sheet restated effects reductions 917 prepaid expenses current assets 603 deferred charges assets 996 federal taxes income 524 noncurrent deferred income taxes income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled approximately 46400 december 31 2016 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable possible remittance earnings intended reinvested indefinitely end 2016 deferred income taxes recorded undistributed earnings certain international operations indefinite reinvestment earnings planned company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods fs50 notes consolidated financial statements millions dollars except pershare amounts following table indicates changes company’s unrecognized tax benefits years ended december 31 2016 2015 2014 term “unrecognized tax benefits” accounting standards income taxes refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included approximately 74 percent 3031 unrecognized tax benefits december 31 2016 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2016 jurisdictions latest years income tax examinations finalized follows united states 2011 nigeria 2000 angola 2009 kazakhstan 2007 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions company unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2016 accruals 424 anticipated interest penalty obligations included consolidated balance sheet compared accruals 399 yearend 2015 income tax expense associated interest penalties 38 195 4 2016 2015 2014 respectively fs51 notes consolidated financial statements millions dollars except pershare amounts note 20 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders year following balance sheet date company may periodically enter interest rate swaps portion shortterm debt december 31 2016 company interest rate swaps shortterm debt december 31 2016 company 9000 committed credit facilities various major banks enable refinancing shortterm obligations longterm basis credit facilities consist 364day facility enables borrowing 6900 company convert amounts outstanding term loan period one year 2100 fiveyear facility expiring december 2020 facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2016 company classified 9000 8000 shortterm debt longterm december 31 2016 2015 respectively settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis fs52 notes consolidated financial statements millions dollars except pershare amounts note 21 longterm debt total longterm debt excluding capital leases december 31 2016 35193 company’s longterm debt outstanding yearend 2016 2015 follows weightedaverage interest rate december 31 2016 interest rate december 31 2016 chevron automatic shelf registration statement expires august 2018 registration statement unspecified amount nonconvertible debt securities issued guaranteed company longterm debt principal balance 32490 matures follows 2017 6256 2018 6722 2019 4000 2020 4054 2021 2054 2021 9404 company completed bond issuance 6800 may 2016 fs53 notes consolidated financial statements millions dollars except pershare amounts effective january 1 2016 chevron adopted asu 201503 retrospective basis standard requires debt issuance costs related recognized liability presented balance sheet direct deduction carrying amount debt liability consolidated balance sheet longterm debt net unamortized discounts debt issuance costs 35193 december 31 2016 33542 december 31 2015 see note 10 beginning page fs37 information concerning fair value company’s longterm debt note 22 accounting suspended exploratory wells company continues capitalize exploratory well costs completion drilling well found sufficient quantity reserves justify completion producing well b business unit making sufficient progress assessing reserves economic operating viability project either condition met company obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense following table indicates changes company’s suspended exploratory well costs three years ended december 31 2016 represents property sales following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 3095 exploratory well costs capitalized one year december 31 2016 1939 15 projects related projects drilling activities underway firmly planned near future 1156 balance related 20 projects areas requiring major capital expenditure production could begin additional drilling efforts underway firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1156 referenced following activities associated assessing reserves projects’ economic viability 190 two projects undergoing frontend engineering design final investment decision expected within four years b 107 two projects development concept review government c 816 seven projects development alternatives review 43 nine projects miscellaneous activities projects smaller amounts suspended progress made 35 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations associated projects half decisions expected occur next five years fs54 notes consolidated financial statements millions dollars except pershare amounts 3095 suspended well costs capitalized period greater one year december 31 2016 represents 160 exploratory wells 35 projects tables contain aging costs well project basis note 23 stock options sharebased compensation expense stock options 2016 2015 2014 271 176 tax 312 203 tax 287 186 tax respectively addition compensation expense stock appreciation rights restricted stock performance shares restricted stock units 371 241 tax 32 21 tax 71 46 tax 2016 2015 2014 respectively significant stockbased compensation cost capitalized december 31 2016 december 31 2015 cash received payment option exercises sharebased payment arrangements 2016 2015 2014 647 195 527 respectively actual tax benefits realized tax deductions option exercises 21 17 54 2016 2015 2014 respectively cash paid settle performance shares stock appreciation rights 82 104 204 2016 2015 2014 respectively awards chevron longterm incentive plan ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance shares nonstock grants april 2004 may 2023 260 million shares may issued ltip awards issued may 29 2013 50 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2016 contractual terms vary three years performance shares restricted stock units 10 years stock options stock appreciation rights awards issued 2017 contractual terms vary three years performance shares special restricted stock units 5 years standard restricted stock units 10 years stock options stock appreciation rights forfeitures performance shares restricted stock units stock appreciation rights recognized occur forfeitures stock options estimated using historical forfeiture data dating back 1990 fair market values stock options stock appreciation rights granted 2016 2015 2014 measured date grant using blackscholes optionpricing model following weightedaverage assumptions 1 expected term based historical exercise postvesting cancellation data 2 volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2016 presented fs55 notes consolidated financial statements millions dollars except pershare amounts total intrinsic value ie difference exercise price market price options exercised 2016 2015 2014 240 120 398 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2016 169 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted plans cost expected recognized weightedaverage period 17 years january 1 2016 number ltip performance units outstanding equivalent 2192937 shares 2016 1019900 units granted 718472 units vested cash proceeds distributed recipients 100937 units forfeited december 31 2016 units outstanding 2393428 fair value liability recorded instruments 381 measured using monte carlo simulation method addition outstanding stock appreciation rights awards granted various ltip programs totaled approximately 54 million equivalent shares december 31 2016 liability 125 recorded awards note 24 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement benefit opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs beginning 2017 medical coverage medicareeligible retirees company’s main us medical plan provided thirdparty private exchange increase premedicare company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension opeb plans 2016 2015 follows fs56 notes consolidated financial statements millions dollars except pershare amounts recognized consolidated balance sheet company’s pension opeb plans december 31 2016 2015 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 5511 6478 end 2016 2015 respectively amounts consisted accumulated benefit obligations us international pension plans 11954 4676 respectively december 31 2016 12032 4684 respectively december 31 2015 information us international pension plans accumulated benefit obligation excess plan assets december 31 2016 2015 components net periodic benefit cost amounts recognized consolidated statement comprehensive income 2016 2015 2014 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2016 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 11 years respectively amortization periods represent estimated average remaining service employees expected receive fs57 notes consolidated financial statements millions dollars except pershare amounts benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2017 company estimates actuarial losses 340 41 5 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively addition company estimates additional 408 recognized “accumulated comprehensive loss” 2017 related lumpsum settlement costs main us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2016 approximately 4 10 years us international pension plans respectively 11 years opeb plans 2017 company estimates prior service credits costs 5 12 28 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies 2016 company used expected longterm rate return 725 percent us pension plan assets account 69 percent company’s pension plan assets 2015 2014 company used longterm rate return 75 percent plan marketrelated value assets main us pension plan used determination pension expense based market values three months preceding yearend measurement date management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension opeb plan obligations expense reflect rate benefits could effectively settled equal equivalent single rate resulting yield curve analysis considered projected benefit payments specific companys plans yields highquality bonds beginning december 31 2015 measurement date projected cash flows discounted valuation date using yield curve main us pension opeb plans effective discount rates derived analysis end 2016 39 percent main us pension plan 41 percent main us opeb plan discount rates plans end 2015 40 45 percent respectively 2014 37 41 percent plans respectively beginning fiscal year ended december 31 2016 company changed method used estimate service interest cost associated companys main us pension opeb plans new method costs estimated applying spot rates along yield curve relevant projected cash flows prior years service interest costs estimated utilizing single weightedaverage discount rate derived yield curve used measure defined benefit obligations beginning year benefit assumptions measurement accumulated postretirement benefit obligation december 31 2016 main us opeb plan assumed health care costtrend rates start 69 percent 2017 gradually decline 45 percent 2025 beyond measurement december 31 2015 assumed health care costtrend rates started fs58 notes consolidated financial statements millions dollars except pershare amounts 71 percent 2016 gradually declined 45 percent 2025 beyond measurements annual increase companys premedicare contributions upon retirement capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s premedicare medical contributions main us plan 1percentagepoint change assumed health care costtrend rates would following effects worldwide plans plan assets investment strategy fair value measurements company’s pension plans 2016 2015 us equities include investments company’s common stock amount 12 december 31 2016 9 december 31 2015 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 alternative investments focus marketneutral strategies low expected correlation traditional asset classes funds level 2 designation mainly based restriction advanced notification redemptions typically thirty days less required fs59 notes consolidated financial statements millions dollars except pershare amounts effects fair value measurements using significant unobservable inputs changes level 3 plan assets outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 90 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan companys benefit plan investment committee established following approved asset allocation ranges equities 3060 percent fixed income cash 2065 percent real estate 015 percent alternative investments 015 percent alternative investments range expanded 2016 diversify portfolio uk pension plan uk board trustees established following asset allocation guidelines equities 3050 percent fixed income cash 3570 percent real estate 515 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety factors including market conditions illiquidity constraints mitigate concentration risks assets invested across multiple asset classes active investment managers passive index funds company prefund opeb obligations cash contributions benefit payments 2016 company contributed 406 464 us international pension plans respectively 2017 company expects contributions approximately 200 us plans 250 international pension plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments tax law changes economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying opeb benefits approximately 163 2017 189 paid 2016 following benefit payments include estimated future service expected paid company next 10 years employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip compensation expense esip totaled 281 316 2016 2015 2014 respectively fs60 notes consolidated financial statements millions dollars except pershare amounts benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2016 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2016 2015 trust assets 35 36 respectively invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate business unit individual performance prior year charges expense cash bonuses 662 690 965 2016 2015 2014 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 23 beginning page fs55 note 25 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 19 beginning page fs49 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return settlement open tax years well tax issues countries company conducts businesses expected material effect consolidated financial position liquidity company opinion management adequate provision made income franchise taxes years examination subject future examination guarantees company two guarantees equity affiliates totaling 1157 amount 749 associated financing arrangement equity affiliate approximate 5year remaining term guarantee maximum amount reduced payments made affiliate remaining amount 408 associated certain payments terminal use agreement entered equity affiliate approximate 11year remaining term guarantee maximum guarantee amount reduced certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability either guarantee indemnifications acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2017 1527 2018 1566 2019 1389 2020 1071 2021 968 2022 2572 portion commitments may ultimately shared project partners total payments agreements approximately 1300 2016 1900 2015 3700 2014 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action fs61 notes consolidated financial statements millions dollars except pershare amounts correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various operating closed divested sites including limited federal superfund sites analogous sites state laws refineries chemical plants marketing facilities crude oil fields mining sites although company provided known environmental obligations probable reasonably estimable likely company continue incur additional liabilities amount additional future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity chevron’s environmental reserve december 31 2016 1467 included balance 284 related remediation activities approximately 146 sites company identified potentially responsible party provisions federal superfund law analogous state laws provide joint several liability responsible parties future actions regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2016 environmental reserves balance 1183 808 related company’s us downstream operations 51 international downstream operations 322 upstream operations 2 businesses liabilities sites primarily associated company’s plans activities remediate soil groundwater contamination company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2016 recorded liability material company’s results operations consolidated financial position liquidity refer note 26 page fs62 discussion company’s asset retirement obligations contingencies november 7 2011 drilling development well deepwater frade field 75 miles offshore brazil unanticipated pressure spike caused oil migrate well bore series fissures sea floor emitting approximately 2400 barrels oil source seep substantially contained within four days well plugged abandoned march 14 2012 company identified small second seep different part field evidence coastal wildlife impacts related either seeps emerged reported company’s previously filed periodic reports resolved civil claims relating incidents brought brazilian federal district prosecutor also reported previously federal district prosecutor also filed criminal charges chevron 11 chevron employees charges dismissed trial court february 19 2013 reinstated appellate court october 9 2013 upon chevron’s motion reconsideration dismissed appellate court august 27 2015 federal district prosecutor appealed appellate court’s decision chevron receives claims submits claims customers trading partners joint venture partners us federal state local regulatory bodies governments contractors insurers suppliers individuals amounts claims individually aggregate may significant take lengthy periods resolve may result gains losses future periods company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result significant gains losses future periods note 26 asset retirement obligations company records fair value liability asset retirement obligation aro asset liability legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates fs62 notes consolidated financial statements millions dollars except pershare amounts aros primarily recorded company’s crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2016 2015 2014 table amount associated revisions estimated cash flows 2016 reflects decreased cost estimates abandon wells equipment facilities delayed timing abandonment longterm portion 14243 balance end 2016 13447 note 27 restructuring reorganization costs 2015 early 2016 company recorded accruals employee reduction programs related restructuring reorganization corporate staffs certain upstream operations employee reduction programs substantially completed remaining payments anticipated made early 2017 beforetax charge 353 recorded 2015 associated programs 293 remained outstanding december 31 2015 2016 company recorded additional beforetax charge 83 made payments 316 associated liabilities following table summarizes accrued severance liability classified current consolidated balance sheet note 28 financial information earnings 2016 included aftertax gains approximately 800 relating sale certain properties amount approximately 600 200 related downstream upstream respectively earnings 2015 included aftertax gains approximately 2300 relating sale certain properties approximately 1800 500 related downstream upstream assets respectively earnings 2016 included aftertax charges approximately 2900 impairments asset writeoffs related upstream 110 related downstream earnings 2015 included aftertax charges approximately 3000 impairments asset writeoffs related upstream financial information follows includes 1 344 118 2016 2015 2014 respectively company’s share equity affiliates’ foreign currency effects company 4581 goodwill consolidated balance sheet related primarily 2005 acquisition unocal company tested goodwill impairment 2016 impairment required fs63 fiveyear financial summary unaudited fs64 supplemental information oil gas producing activities unaudited accordance fasb sec disclosure requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information company’s estimated net proved reserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes table costs incurred exploration property acquisitions development1 fs65 supplemental information oil gas producing activities unaudited estimated discounted future net cash flows amounts consolidated companies organized geographic areas including united states americas africa asia australiaoceania europe amounts affiliated companies include chevron’s equity interests tengizchevroil tco republic kazakhstan affiliates principally venezuela angola refer note 16 beginning page fs43 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs66 supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2016 2015 2014 shown following table net income loss exploration production activities reported page fs41 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs41 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 26 “asset retirement obligations” page fs62 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses fs67 supplemental information oil gas producing activities unaudited table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 26 “asset retirement obligations” page fs62 includes foreign currency gains losses gains losses property dispositions miscellaneous income expenses table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel fs68 supplemental information oil gas producing activities unaudited table v reserve quantity information summary net oil gas reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three potentially recoverable within commercial classification proved reserves two categories unproved probable possible potentially recoverable categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation company maintains reserves advisory committee rac chaired manager global reserves organization separate upstream operating organization manager global reserves 30 years’ experience working oil gas industry holds undergraduate graduate degrees geoscience experience includes various technical management roles providing reserve resource estimates support major capital exploration projects 10 years managing oil gas reserves processes named distinguished lecturer american association petroleum geologists active member fs69 supplemental information oil gas producing activities unaudited american association petroleum geologists sepm society sedimentary geologists society petroleum engineers rac members degreed professionals 10 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science finance members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine reserve volumes calculated using consistent appropriate standards procedures technology maintain global reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields large proved reserves quantities reviews include examination provedreserve records documentation compliance global reserves manual addition thirdparty engineering consultants used supplement company’s reserves estimation controls procedures including use thirdparty audits selected oil gas assets technologies used establishing proved reserves additions 2016 additions chevron’s proved reserves based wide range geologic engineering technologies information generated wells well logs wire line sampling production pressure testing fluid analysis core analysis integrated seismic data regional geologic studies information analogous reservoirs provide “reasonably certain” proved reserves estimates proprietary commercially available analytic tools including reservoir simulation geologic modeling seismic processing used interpretation subsurface data technologies utilized extensively company past company believes provide high degree confidence establishing reliable consistent reserves estimates proved undeveloped reserves end 2016 proved undeveloped reserves totaled 36 billion barrels oilequivalent boe decrease 656 million boe yearend 2015 decrease due transfer 11 billion boe proved developed 7 million boe revisions 7 million boe sales partially offset increases 277 million boe improved recovery 189 million boe extensions discoveries 10 million boe acquisitions 2016 investments totaling approximately 88 billion oil gas producing activities 19 billion nonoil gas producing activities expended advance development proved undeveloped reserves australia accounted 23 billion total mainly development construction activities wheatstone lng project expenditures 23 billion united states related primarily various development activities gulf mexico midcontinent region asia expenditures year totaled approximately 29 billion primarily related development projects tco affiliate kazakhstan thailand africa 16 billion expended various offshore development natural gas projects nigeria angola republic congo development activities canada primarily responsible 13 billion expenditures americas reserves remain proved undeveloped five years result several factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2016 company held approximately 22 billion boe proved undeveloped reserves remained undeveloped five years majority reserves three locations company proven track record developing major projects australia approximately 600 million boe remained undeveloped five years related gorgon wheatstone projects company currently constructing liquefaction facilities australia develop natural gas africa approximately 400 million boe remained undeveloped five years primarily due facility constraints various fields infrastructure associated escravos gas projects nigeria affiliates account 14 billion boe proved undeveloped reserves 10 billion boe fs70 supplemental information oil gas producing activities unaudited remained undeveloped five years majority related tco affiliate kazakhstan tco field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2016 reductions commodity prices negatively impacted economic limits oil gas properties resulting proved reserve decreases positively impacted proved reserves due entitlement effects yearend reserves volumes updated circumstances significant changes discussed appropriate reserves sections 2016 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved reserves ranged 32 percent 45 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities three years ending december 31 2016 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected events circumstances outside company’s control delays government permitting partner approvals development plans changes oil gas prices opec constraints geopolitical uncertainties civil unrest december 31 2016 proved reserves company 111 billion boe company’s estimated net proved reserves liquids including crude oil condensate natural gas liquids synthetic oil years 2014 2015 2016 shown table page fs72 company’s estimated net proved reserves natural gas shown page fs73 noteworthy changes liquids proved reserves 2014 2016 discussed shown table following page revisions 2014 drilling midland delaware basins improved field performance drilling california accounted majority 90 million barrel increase united states improved field performance various nigeria fields primarily responsible 74 million barrel increase africa asia drilling performance across numerous assets primarily indonesia resulted 80 million barrel increase 2015 entitlement effects improved performance responsible the163 million barrel increase tco affiliate kazakhstan asia entitlement effects drilling performance across numerous assets resulted 164 million barrel increase improved field performance various nigerian fields including agbami primarily responsible 60 million barrel increase africa synthetic oil reserves canada increased 80 million barrels primarily due entitlement effects 2016 entitlement effects mainly responsible 64 million barrel increase tco affiliate kazakhstan improved field performance various gulf mexico fields including jackst malo san joaquin valley primarily responsible 109 million barrel increase united states asia entitlement effects drilling improved performance across numerous assets resulted 50 million barrel increase improved recovery 2014 improved recovery increased reserves 34 million barrels primarily due secondary recovery projects united states mostly related steamflood expansions california 2016 improved recovery increased reserves 293 million barrels primarily due future growth project tco affiliate kazakhstan extensions discoveries 2014 extensions discoveries midland delaware basins gulf mexico primarily responsible 164 million barrel increase united states 2015 extensions discoveries midland delaware basins primarily responsible 137 million barrel increase united states 2016 extensions discoveries midland delaware basins primarily responsible 131 million barrel increase united states purchases 2014 purchase additional reserves canada responsible 26 million barrel increase synthetic oil sales 2014 sale company’s interests chad responsible 20 million barrel decrease africa 2016 sales 34 million barrels united states primarily gulf mexico shelf fs71 supplemental information oil gas producing activities unaudited net proved reserves crude oil condensate natural gas liquids synthetic oil ending reserve balances north america 169 155 142 south america 54 81 96 2016 2015 2014 respectively reserves associated canada ending reserve balances africa 31 34 37 south america 87 97 108 2016 2015 2014 respectively included yearend reserve quantities related productionsharing contracts psc refer page e10 definition psc pscrelated reserve quantities 19 percent 20 percent 19 percent consolidated companies 2016 2015 2014 respectively fs72 supplemental information oil gas producing activities unaudited net proved reserves natural gas ending reserve balances north america south america 172 174 59 475 540 1064 2016 2015 2014 respectively ending reserve balances africa south america 939 1044 1043 147 179 189 2016 2015 2014 respectively total “as sold” volumes 1744 1742 1695 2016 2015 2014 respectively includes reserve quantities related productionsharing contracts psc refer page e11 definition psc pscrelated reserve quantities 15 percent 16 percent 19 percent consolidated companies 2016 2015 2014 respectively noteworthy changes natural gas proved reserves 2014 2016 discussed shown table revisions 2014 net revisions 775 bcf australia primarily due development drilling gorgon 2015 positive drilling performance wheatstone gorgon responsible 974 bcf increase australia net revisions 480 bcf asia primarily due improved field performance thailand entitlement effects improved performance kazakhstan majority net decrease 435 bcf americas due deferral infill drilling compression projects well drilling results trinidad tobago 218 bcf increase tco affiliate due entitlement effects improved performance 2016 development activities primarily wheatstone responsible 853 bcf increase australia net revisions 443 bcf asia primarily due improved field performance china thailand extensions discoveries 2014 extensions discoveries 614 bcf united states primarily appalachian region delaware basin 2015 extensions discoveries 659 bcf united states primarily appalachian region midland delaware basins 2016 extensions discoveries 388 bcf united states primarily appalachian region midland delaware basins sales 2016 sales 544 bcf united states primarily gulf mexico shelf michigan midcontinent region fs73 supplemental information oil gas producing activities unaudited table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows calculated accordance sec fasb requirements includes using average firstdayofthemonth oil gas prices 12month period prior end reporting period estimated future development production costs assuming continuation existing economic conditions estimated costs asset retirement obligations includes costs retire existing wells facilities addition future wells facilities necessary produce proved undeveloped reserves estimated future income taxes based appropriate statutory tax rates discounted future net cash flows calculated using 10 percent midperiod discount factors estimates provedreserve quantities imprecise change time new information becomes available probable possible reserves may become proved future excluded calculations valuation requires assumptions timing amount future development production costs calculations made december 31 year represent management’s estimate company’s future cash flows value oil gas reserves following table caption “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs74 supplemental information oil gas producing activities unaudited table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs75 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts 3 exhibits exhibit index following pages lists exhibits filed part report schedule ii valuation qualifying accounts see also note 16 consolidated financial statements beginning page 74 item 16 form 10k summary applicable exhibit index attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” indicates management contract compensatory plan arrangement filed herewith furnished herewith pursuant item 601b4 regulation sk certain instruments respect companys longterm debt filed annual report form 10k copy instrument furnished securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 22nd day february 2019 chevron corporation michael k wirth michael k wirth chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 22nd day february 2019 principal executive officer director michael k wirth michael k wirth chairman board chief executive officer principal financial officer patricia e yarrington patricia e yarrington vice president chief financial officer principal accounting officer jeanette l ourada jeanette l ourada vice president comptroller mary francis mary francis attorneyinfact directors wanda austin wanda austin john b frank john b frank alice p gast alice p gast enrique hernandez jr enrique hernandez jr charles w moorman iv charles w moorman iv dambisa f moyo dambisa f moyo debra reedklages debra reedklages ronald sugar ronald sugar inge g thulin inge g thulin james umpleby iii james umpleby iiiitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts three years period ended december 31 2019 3 exhibits exhibit index following pages lists exhibits filed part report schedule ii valuation qualifying accounts see also note 15 consolidated financial statements beginning page 74 item 16 form 10k summary applicable exhibit index attached exhibit 101 report documents formatted ixbrl inline extensible business reporting language financial information contained ixbrlrelated documents “unaudited” “unreviewed” indicates management contract compensatory plan arrangement filed herewith furnished herewith pursuant item 601b4 regulation sk certain instruments respect company’s longterm debt filed annual report form 10k copy instrument furnished securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 21st day february 2020 chevron corporation michael k wirth michael k wirth chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 21st day february 2020 principal executive officer director michael k wirth michael k wirth chairman board chief executive officer principal financial officer pierre r breber pierre r breber vice president chief financial officer principal accounting officer david inchausti david inchausti vice president comptroller mary francis mary francis attorneyinfact directors wanda austin wanda austin john b frank john b frank alice p gast alice p gast enrique hernandez jr enrique hernandez jr charles w moorman iv charles w moorman iv dambisa f moyo dambisa f moyo debra reedklages debra reedklages ronald sugar ronald sugar james umpleby iii james umpleby iiinannanitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included page 42 schedule ii valuation qualifying accounts 3 exhibits exhibit index pages e1 e2 lists exhibits filed part report schedule ii valuation qualifying accounts millions dollars see also note 15 consolidated financial statements beginning page fs47 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 24th day february 2011 chevron corporation john watson john watson chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 24th day february 2011 financial table contents fs2 management’s discussion analysis financial condition results operations key financial results fs2 earnings major operating area fs2 business environment outlook fs2 operating developments fs6 results operations fs7 consolidated statement income fs10 selected operating data fs11 liquidity capital resources fs12 financial ratios fs13 guarantees offbalancesheet arrangements contractual obligations contingencies fs14 financial derivative instruments fs15 transactions related parties fs16 litigation contingencies fs16 environmental matters fs19 critical accounting estimates assumptions fs20 new accounting standards fs23 quarterly results stock market data fs24 fs25 consolidated financial statements report management fs25 report independent registered public accounting firm fs26 consolidated statement income fs27 consolidated statement comprehensive income fs28 consolidated balance sheet fs29 consolidated statement cash flows fs30 consolidated statement equity fs31 fs32 fs1 management’s discussion analysis financial condition results operations key financial results earnings major operating area activities reported chevron’s upstream downstream operating segments changed effective january 1 2010 results chemicals businesses reported part downstream segment addition company’s significant upstreamenabling operations primarily gastoliquids project major international export pipelines reclassified downstream segment upstream segment prior period information report revised conform 2010 presentation refer “results operations” section beginning page fs7 discussion financial results major operating area three years ended december 31 2010 business environment outlook chevron global energy company substantial business activities following countries angola argentina australia azerbaijan bangladesh brazil cambodia canada chad china colombia democratic republic congo denmark indonesia kazakhstan myanmar netherlands nigeria norway partitioned zone saudi arabia kuwait philippines republic congo singapore south africa south korea thailand trinidad tobago united kingdom united states venezuela vietnam earnings company depend mostly profitability upstream downstream business segments single biggest factor affects results operations segments movement price crude oil downstream business crude oil largest cost component refined products overall trend earnings typically less affected results company’s activities investments earnings company period may also influenced events transactions infrequent unusual nature company’s operations especially upstream also affected changing economic regulatory political environments various countries operates including united states civil unrest acts violence strained relations government company governments may impact company’s operations investments developments times significantly affected company’s operations results carefully considered management evaluating level current future activity countries sustain longterm competitive position upstream business company must develop replenish inventory projects offer attractive financial returns investment required identifying promising areas exploration acquiring necessary rights explore produce crude oil natural gas drilling successfully handling many technical operational details safe costeffective manner important factors effort projects often require long lead times large capital commitments time certain governments sought renegotiate contracts impose additional costs company governments may attempt future company continue monitor developments take account evaluating future investment opportunities otherwise seek mitigate risks company’s current operations future prospects company also continually evaluates opportunities dispose assets expected provide sufficient longterm value acquire assets operations complementary asset base help augment company’s financial performance growth refer “results operations” section beginning page fs7 discussions net gains asset sales 2010 asset dispositions restructurings may also occur future periods could result significant gains losses fs2 recent years chevron oil gas industry generally experienced increase certain costs exceeded general trend inflation many areas world increase costs affected company’s operating expenses capital programs business segments particularly upstream softening cost pressures started late 2008 continued 2009 industry costs began level fourth quarter 2009 rose slightly 2010 company continues actively manage schedule work contracting procurement supplychain activities effectively manage costs company closely monitors developments financial credit markets level worldwide economic activity implications company movements prices crude oil natural gas management takes developments account conduct daily operations business planning company remains confident underlying financial strength address potential challenges presented current environment refer also “liquidity capital resources” section beginning page fs12 comments related earnings trends company’s major business areas follows upstream earnings upstream segment closely aligned industry price levels crude oil natural gas crude oil natural gas prices subject external factors company control including product demand connected global economic conditions industry inventory levels production quotas imposed organization petroleum exporting countries opec weatherrelated damage disruptions competing fuel prices regional supply interruptions fears thereof may caused military conflicts civil unrest political uncertainty moreover factors could also inhibit company’s production capacity affected region company monitors developments closely countries operates holds investments seeks manage risks operating facilities businesses besides impact fluctuation prices crude oil natural gas longerterm trend earnings upstream segment also function factors including company’s ability find acquire efficiently produce crude oil natural gas changes fiscal terms contracts changes tax laws regulations price levels capital exploratory costs operating expenses associated production crude oil natural gas also subject external factors beyond company’s control external factors include general level inflation also commodity prices charged industry’s material service providers affected volatility industry’s supplyanddemand conditions materials services capital exploratory expenditures operating expenses also affected damage production facilities caused severe weather civil unrest chart left shows trend benchmark prices west texas intermediate wti crude oil us henry hub natural gas wti price averaged 79 per barrel fullyear 2010 compared 62 2009 midfebruary 2011 wti price 85 differential crude oil prices exists high quality highgravity lowsulfur crudes lower quality lowgravity highsulfur amount differential period associated supply heavy crude available versus demand function number refineries able process lower quality feedstock light products motor gasoline jet fuel aviation gasoline diesel fuel differential widened 2010 primarily due strong diesel prices relatively weaker fuel oil prices chevron produces shares production heavy crude oil california chad indonesia partitioned zone saudi arabia kuwait venezuela certain fields angola china united kingdom sector north sea see page fs11 company’s average us international crude oil realizations contrast price movements global market crude oil price changes natural gas many regional markets closely aligned supplyanddemand conditions markets united states prices henry hub averaged 450 per thousand cubic feet mcf 2010 compared 380 2009 midfebruary 2011 henry hub spot price 420 per mcf fluctuations price natural gas united states closely associated customer demand relative volumes produced north america level inventory underground storage fs3 management’s discussion analysis financial condition results operations certain international natural gas markets company operates different supply demand regulatory circumstances historically resulted lower average sales prices company’s production natural gas locations chevron investing longterm projects install infrastructure produce liquefy natural gas transport tanker markets greater demand results higher prices international natural gas realizations averaged 460 per mcf 2010 compared 400 per mcf 2009 realizations reflect strong demand energy certain asian markets see page fs11 company’s average natural gas realizations us international regions company’s worldwide net oilequivalent production 2010 averaged 2763 million barrels per day onefifth company’s net oilequivalent production 2010 occurred opecmember countries angola nigeria venezuela partitioned zone saudi arabia kuwait opec quotas effect company’s net crude oil production 2010 production 2009 reduced average 20000 barrels per day due quotas imposed opec imposed curtailments took place first half 2009 december 2010 meeting members opec supported maintaining production quotas effect since december 2008 company estimates oilequivalent production 2011 average approximately 2790 million barrels per day estimate subject many factors uncer tainties including additional quotas may imposed opec price effects production volumes calculated production sharing variableroyalty provisions certain agreements changes fiscal terms restrictions scope company operations delays project startups fluctuations demand natural gas various markets weather conditions may shut production civil unrest changing geopolitics delays completion maintenance turnarounds greaterthanexpected declines production mature fields disruptions operations outlook future production levels also affected size number economic investment opportunities new largescale projects time lag initial exploration beginning production investments upstream projects generally begin well advance start associated crude oil natural gas production significant majority chevron’s upstream investment made outside united states refer “results operations” section pages fs7 fs8 additional discussion company’s upstream business refer table v beginning page fs71 tabulation company’s proved net oil gas reserves geographic area beginning 2008 yearend 2008 2010 accompanying discussion major changes proved reserves geographic area threeyear period ending december 31 2010 gulf mexico update april 2010 accident occurred transocean deepwater horizon deepwater drilling rig gulf mexico resulting loss life sinking rig significant oil spill rig drilling exploratory well bpoperated macondo prospect chevron participant well subsequent event us department interior put place moratorium drilling wells using subsea blowout preventers bops surface bops floating facility gulf mexico pacific regions october 2010 secretary interior lifted drilling moratorium provided operators certify compliance newly expanded rules requirements demonstrate availability adequate blowout containment resources moratorium ensuing slowdown issuing drilling permits since moratorium lifted resulted delays shallow water drilling activity delayed drilling exploratory deepwater wells impacted development drilling operated nonoperated projects gulf mexico company’s daily net oilequivalent production gulf mexico reduced 10000 barrels per day full year company submitted several deepwater drilling permit applications plans submit additional applications 2011 two deepwater drillships standby pending issuance permits fs4 us bureau ocean energy management regulation enforcement boemre drill wells gulf mexico third deepwater drillship drilling water injection well tahiti field additionally completion previously drilled wells recommenced nonoperated perdido caesartonga projects future effects incident including new additional regulations may adopted timing boemre issuing drilling permits fully known time chevron remains committed deepwater exploration development gulf mexico deepwater basins around world moratorium chevron participated number industry efforts identify opportunities improve industry standards prevention intervention spill response july 2010 chevron several companies announced plans build deploy rapid response system available capture contain crude oil unlikely event future well blowout deepwater gulf mexico new system engineered used water depths 10000 feet designed capacity contain 100000 barrels per day potential expansion companies committed equally fund initial 1 billion investment system additional ongoing costs operations maintenance system components initial agreement secure containment equipment announced equipment expected secured available coming months new system targeted completion early 2012 companies formed organization marine well containment company operate maintain system companies invited encouraged participate organization downstream earnings downstream segment closely tied margins refining manufacturing marketing products include gasoline diesel jet fuel lubricants fuel oil fuel lubricant additives petrochemicals industry margins sometimes volatile affected global regional supplyanddemand balance refined products petrochemicals changes price crude oil refinery petrochemical feedstocks natural gas industry margins also influenced inventory levels geopolitical events cost materials services refinery chemical plant capacity utilization maintenance programs disruptions refineries chemical plants resulting unplanned outages due severe weather fires operational events factors affecting profitability downstream operations include reliability efficiency company’s refining marketing petrochemical assets effectiveness crude oil product supply functions volatility tankercharter rates company’s shipping operations driven industry’s demand crude oil product tankers factors beyond company’s control include general level inflation energy costs operate company’s refining marketing petrochemical assets company’s significant marketing areas west coast north america us gulf coast latin america asia southern africa united kingdom chevron operates significant ownership interests refineries areas except latin america third quarter 2010 company completed exit district columbia delaware indiana kentucky north carolina new jersey maryland ohio pennsylvania south carolina virginia west virginia parts tennessee company sold chevron texacobranded motor fuels retail customers approximately 1100 stations commercial industrial customers supply arrangements sales markets represented approximately 8 percent company’s total 2009 us retail fuel sales volumes company’s refining marketing margins 2010 improved 2009 remain relatively weak due economic slowdown excess refined product supplies surplus refining capacity expecting conditions continue several years first quarter 2010 company announced downstream businesses would restructured improve operating efficiency achieve sustained improvement financial performance part restructuring employeereduction programs announced united states international downstream operations initial estimate included approximately 3200 employees due redeployment efforts within company currently expected approximately 2800 employees downstream operations terminated programs end 2011 1100 affected employees located united states 2010 1400 employees terminated worldwide refer note 23 consolidated financial statements beginning page fs59 discussion 2010 company solicited bids 13 us terminals certain operations europe including company’s pembroke refinery caribbean select central america africa markets sales part company’s ongoing effort concentrate downstream resources capital strategic global assets potential market exits dispositions assets actions may result gains losses future periods fourth quarter 2010 company completed sale six us terminals certain marketing businesses africa resulted gains material company also late 2010 company completed sale 234 percent ownership interest colonial pipeline company resulted gain sale nearly 400 million refer “results operations” section page fs9 additional discussion company’s downstream operations consists mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies first quarter 2010 employeereduction programs announced corporate staffs yearend expected approximately 400 employees corporate staffs terminated programs end 2011 including approximately 100 terminated 2010 refer note 23 consolidated financial statements beginning page fs59 discussion fs5 management’s discussion analysis financial condition results operations operating developments key operating developments events 2010 early 2011 included following upstream australia construction activities barrow island activities gorgon project progressed schedule 2010 award approximately 25 billion contracts materials services clearing plant site completion first stage construction village commencement module fabrication progression studies possible expansion project early 2011 company signed additional binding liquefied natural gas lng sales purchase agreement spa asian customer company signed five binding lng spas asian customers delivery 47 million metric tons lng per year negotiations continue finalize two remaining nonbinding heads agreement hoas binding spas would bring lng delivery commitments combined total 90 percent chevron’s share lng project end 2010 company signed nonbinding hoas three asian customers delivery 80 percent chevron’s net lng offtake chevronoperated wheatstone project negotiations continue move three hoas binding spas customers three customers also agreed acquire combined 218 percent nonoperated working interest wheatstone field licenses 175 percent interest foundation natural gas processing facilities time final investment decision project currently undergoing frontend engineering design feed planned capacity 89 million metric tons per year 2010 company announced additional deepwater natural gas discoveries including clio acme prospects 67 percentowned block wa205p yellowglen prospect 50 percentowned block wa268p brederode prospect 50 percentowned block wa364p sappho prospect 50 percentowned block wa392p february 2011 company announced natural gas discovery orthrus prospect 50 percentowned block wa24r discoveries expected contribute growth companyoperated lng projects australia cambodia company completed three successful exploration wells 2010 firsthalf 2011 30year production permit production sharing contract expected approved government final investment decision construction wellhead platform floating storage offloading vessel expected 2011 canada first production achieved jackpine mine third quarter 2010 result athabasca oil sands project expansion 1 activities addition 2010 company acquired approximately 200000 acres shale gas leasehold western canada appraisal acreage expected begin secondhalf 2011 china company acquired 100 percent interest blocks 5330 6418 59 percent interest block 4205 covering combined total exploratory acreage approximately 52 million acres south china sea’s pearl river mouth basin indonesia final investment decision reached development area 13 duri field chevron holds 100 percent working interest company awarded feed contracts december 2010 gendalogehem natural gas development makassar strait offshore east kalimantan indonesia contracts floating production units subsea flowline systems export pipelines onshore receiving facility awarded project kazakhstanrussia approval obtained shareholders governing bodies caspian pipeline consortium 54 billion expansion caspian pipeline capacity 935mile pipeline carries crude oil western kazakhstan dedicated terminal black sea increase 14 million barrels per day liberia company acquired 70 percent interest operatorship three deepwater blocks covering 24 million acres coast liberia western africa threeyear exploratory program began fourth quarter 2010 poland acquisition work commenced october 2010 2d seismic survey across company’s four shale gas licenses southeast poland chevron 100 percentowned operated interest four concessions totalling 11 million acres republic congo discoveries confirmed bilondo marine 2 3 wells within mohobilondo license chevron 315 percent interest permit area romania company successfully bid three shale gas exploration blocks comprising approximately 670000 acres southeast region country february fs6 2011 company acquired 100 percent interest ev2 barlad shale gas concession covering 15 million acres northeast region country russia company signed nonbinding hoa deepwater development partnership shatsky ridge eastern black sea turkey company signed joint operation agreement exploration license black sea chevron acquired 50 percent interest western portion license 3921 56 millionacre block located 220 miles northwest capital city ankara united states march 2010 first oil achieved nonoperated perdido regional development gulf mexico located nearly 8000 feet water perdido also world’s deepest offshore oil gas drilling production spar chevron 375 percent working interest perdido regional host facility company sanctioned development jackst malo project october 2010 company’s first operated project located lower tertiary trend deepwater gulf mexico seven exploration appraisal wells successfully safely drilled fields since 2003 chevron working interest 50 percent jack field 51 percent st malo field december 2010 company sanctioned development 60 percentowned operated big foot project deepwater gulf mexico april 2010 company successfully bid new exploration acreage central gulf mexico lease sale february 2011 company completed acquisition atlas energy inc 447 billion including assumed debt atlas holds one premier acreage positions marcellus shale concentrated southwestern pennsylvania venezuela february 2010 chevronled consortium named operator carabobo 3 heavyoil project composed three blocks orinoco oil belt eastern venezuela joint operating company petroindependencia formed may 2010 work toward commercialization carabobo 3 project initiated consortium holds combined 40 percent interest project downstream africa december 2010 february 2011 company completed sale marketing businesses malawi mauritius réunion tanzania zambia caribbean central america november 2010 company announced agreement sell fuels marketing aviation fuels businesses antigua barbados belize costa rica dominica french guiana grenada guadeloupe guyana martinique nicaragua st kitts st lucia st vincent trinidad tobago transactions expected close third quarter 2011 following receipt required local regulatory government approvals sale part company’s ongoing effort concentrate downstream resources capital strategic global assets europe february 2011 company announced agreement sell fuels finished lubricants aviation fuels businesses spain south korea new 60000barrelperday heavyoil hydrocracker commissioned reached full capacity third quarter 2010 50 percentowned gs caltex yeosu refinery south korea also yeosu refinery gs caltex announced plans construct 53000barrelperday gas oil fluid catalytic cracking unit scheduled startup 2013 units designed increase highvalue product yield lower feedstock costs united states october 2010 company sold 234 percent ownership interest colonial pipeline company january 2011 company announced final investment decision 14 billion project construct lubricants manufacturing facility pascagoula refinery facility manufacture 25000 barrels per day premium base oil common stock dividends quarterly common stock dividend increased 59 percent april 2010 072 per common share making 2010 23rd consecutive year company increased annual dividend payment common stock repurchase program july 2010 company terminated threeyear 15 billion share repurchase program initiated september 2007 place board directors approved new ongoing share repurchase program set term monetary limits company began purchases common stock fourth quarter december 31 2010 88 million common shares acquired program 750 million results operations major operating areas following section presents results operations company’s business segments upstream downstream well “all other” earnings also presented us international geographic areas upstream downstream business segments refer note 11 beginning page fs41 discussion company’s “reportable segments” defined accounting standards segment reporting accounting standards codification asc 280 section also read conjunction discussion “business environment outlook” pages fs2 fs5 us upstream us upstream earnings 41 billion 2010 increased 19 billion 2009 higher prices crude oil natural gas increased earnings 21 billion periods partly offsetting effects higher operating expenses 200 million part due gulf mexico drilling moratorium lower exploration expenses essentially offset higher tax items higher depreciation expenses us upstream earnings 23 billion 2009 decreased 49 billion 2008 lower prices crude oil natural gas reduced earnings 52 billion periods fs7 management’s discussion analysis financial condition results operations gains asset sales declined approximately 900 million partially offsetting effects benefit 13 billion resulting increase net oil equivalent production approximate 600 million benefit income lower operating expenses offset higher depreciation expense benefit lower operating expenses largely associated absence charges damages related 2008 hurricanes gulf mexico company’s average realization us crude oil natural gas liquids 2010 7159 per barrel compared 5436 2009 8843 2008 average natural gas realization 426 per thousand cubic feet 2010 compared 373 790 2009 2008 respectively net oilequivalent production 2010 averaged 708000 barrels per day 1 percent 2009 6 percent 2008 natural field declines 2010 2009 mostly offset increased production tahiti field increase 2009 2008 mainly due startup blind faith field late 2008 tahiti field second quarter 2009 net liquids component oilequivalent production 2010 averaged 489000 barrels per day 1 percent 2009 16 percent compared 2008 net natural gas production averaged 13 billion cubic feet per day 2010 approximately 6 percent 2009 12 percent 2008 refer “selected operating data” table page fs11 threeyear comparative production volumes united states international upstream earnings 136 billion 2010 increased 49 billion 2009 higher prices crude oil natural gas increased earnings 43 billion increase net oilequivalent production 2010 period benefited income 12 billion net benefit partly offset higher operating expenses 500 million favorable change tax items 450 million mostly offset higher depreciation expenses 2009 period included gains 500 million asset sales tax items related gorgon project australia foreign currency effects decreased earnings 293 million 2010 period compared reduction 578 million year earlier primarily reflecting noncash losses balance sheet remeasurement international upstream earnings 87 billion 2009 decreased 64 billion 2008 lower prices crude oil natural gas reduced earnings 70 billion foreign currency effects higher operating depreciation expenses decreased income total 22 billion partially offsetting items benefits 23 billion resulting increase sales volumes crude oil 500 million associated asset sales tax items related gorgon project company’s average realization international crude oil natural gas liquids 2010 7268 per barrel compared 5597 2009 8651 2008 average natural gas realization 464 per thousand cubic feet 2010 compared 401 519 2009 2008 respectively international net oilequivalent production 206 million barrels per day 2010 increased 3 percent 11 percent 2009 2008 respectively volumes 2010 include synthetic oil reported 2009 2008 production oil sands canada absent impact prices certain productionsharing variableroyalty agreements net oilequivalent production increased 5 percent 2010 4 percent 2009 compared prior year’s production net liquids component international oilequivalent production 14 million barrels per day 2010 increase approximately 3 percent 2009 14 percent 2008 international net natural gas production 37 billion cubic feet per day 2010 4 percent 3 percent 2009 2008 respectively refer “selected operating data” table page fs11 threeyear comparative international production volumes fs8 us downstream us downstream earned 1339 million 2010 compared loss 121 million 2009 improved margins refined products increased earnings 550 million also contributing increase nearly 400 million gain sale 234 percent ownership interest colonial pipeline company higher earnings chemicals operations increased earnings 300 million largely improved margins 50 percentowned chevron phillips chemical company llc cpchem earnings decreased approximately 15 billion 2009 2008 lower refined product margins resulted earnings decline 17 billion partially offsetting effects lower refined product margins decrease operating expenses benefited earnings 300 million increase 100 million earnings cpchem improvement cpchem reflected lower utility manufacturing costs well absence impairment recorded 2008 benefits offset lower margins sale commodity chemicals sales volumes refined products 135 million barrels per day 2010 decrease 4 percent 2009 decline mainly gasoline jet fuel sales volumes refined products 140 million barrels per day 2009 decrease 1 percent 2008 us branded gasoline sales decreased 573000 barrels per day 2010 representing approximately 7 percent 5 percent declines 2009 2008 respectively decline 2010 relative 2009 2008 primarily due previously announced exits selected eastern us retail markets refer “selected operating data” table page fs11 threeyear comparison sales volumes gasoline refined products refinery input volumes international downstream international downstream earned 1139 million 2010 compared 594 million 2009 higher margins manufacture sale gasoline refined products increased earnings 10 billion favorable swing marktomarket effects derivative instruments benefited earnings 300 million partially offsetting items absence 2009 gains asset sales 550 million higher expenses 200 million primarily related employee reduction transportation costs foreign currency effects reduced earnings 135 million 2010 compared reduction 191 million 2009 earnings 594 million 2009 decreased 12 billion 2008 decline approximately 26 billion periods associated weaker margins manufacture sale gasoline refined products absence gains recorded 2008 derivative instruments foreign currency effects produced unfavorable variance 300 million partially offsetting items 10 billion benefit lower operating expenses associated mainly contract labor professional services transportation costs 550 million increase gains asset sales related refined products marketing operations primarily certain countries latin america africa international refined product sales volumes 176 million barrels per day 2010 5 percent lower 2009 mainly due asset sales certain countries africa latin america refined product sales volumes 185 million barrels per day 2009 8 percent lower 2008 mainly due effects asset sales lower demand refer “selected operating data” table page fs11 threeyear comparison sales volumes gasoline refined products refinery input volumes fs9 management’s discussion analysis financial condition results operations includes mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities alternative fuels technology companies net charges 2010 increased 209 million 2009 mainly due higher expenses employee compensation benefits higher corporate tax items partly offset lower provisions environmental remediation sites previously closed sold net charges 2009 decreased 468 million 2008 due lower provisions environmental remediation sites previously closed sold favorable foreign currency effects lower expenses employee compensation benefits consolidated statement income comparative amounts certain income statement categories shown sales operating revenues increased 2010 mainly due higher prices crude oil natural gas refined products lower 2009 prices resulted decreased revenues compared 2008 income equity affiliates increased 2010 2009 largely due higher upstreamrelated earnings tengizchevroil tco kazakhstan petropiar venezuela principally related higher prices crude oil increased crude oil production downstreamrelated affiliate earnings also higher comparative periods primarily due higher earnings cpchem result higher margins sales commodity chemicals improved margins refined products favorable swing foreign currency effects gs caltex south korea also contributed increase downstream affiliate earnings 2010 period income equity affiliates decreased 2009 2008 upstreamrelated affiliate income declined 13 billion mainly due lower earnings tco result lower prices crude oil downstreamrelated affiliate earnings lower approximately 10 billion primarily due weaker margins unfavorable swing foreign currency effects refer note 12 beginning page fs43 discussion chevron’s investments affiliated companies income 11 billion 2010 included net gains approximately 11 billion asset sales income 2009 2008 included net gains asset sales 13 billion interest income approximately 120 million 2010 95 million 2009 340 million 2008 foreign currency effects decreased income 251 million 2010 466 million 2009 increasing income 355 million 2008 addition income 2008 included approximately 700 million favorable settlements items crude oil product purchases 2010 increased 168 billion 2009 due higher prices crude oil natural gas refined products crude oil product purchases 2009 decreased 717 billion 2008 due lower prices crude oil natural gas refined products fs10 increased 2008 mainly due higher amounts well writeoffs united states international operations effective income tax rates 40 percent 2010 43 percent 2009 44 percent 2008 rate lower 2010 2009 primarily due international upstream impacts lower effective tax rate international upstream 2010 primarily driven increased utilization tax credits greater impact rate onetime deferred tax benefits relatively low tax rates asset sales 2009 also smaller portion company income earned higher tax rate international upstream jurisdictions 2010 2009 finally foreign currency remeasurement impacts caused reduction effective tax rate periods rate lower 2009 2008 mainly due effect 2009 deferred tax benefits relatively low tax rates asset sales related international upstream project addition greater proportion beforetax income earned 2009 equity affiliates 2008 equity affiliate income reported single amount aftertax basis consolidated statement income partially offsetting items effect greater proportion income earned 2009 tax jurisdictions higher tax rates refer also discussion income taxes note 15 beginning page fs47 selected operating data12 includes company share equity affiliates mbpd thousands barrels per day mmcfpd millions cubic feet per day mboepd thousands barrels oilequivalents per day bbl barrel mcf thousands cubic feet oilequivalent gas oeg conversion ratio 6000 cubic feet natural gas 1 barrel oil includes natural gas consumed operations mmcfpd united states international 4 includes canada synthetic oil venezuela affiliate synthetic oil 5 includes canada oil sands 6 includes branded unbranded gasoline 7 includes sales affiliates mbpd fs11 management’s discussion analysis financial condition results operations liquidity capital resources cash equivalents time deposits marketable securities total balances 171 billion 88 billion december 31 2010 2009 respectively cash provided operating activities 2010 314 billion compared 194 billion 2009 296 billion 2008 cash provided operating activities net contributions employee pension plans approximately 14 billion 17 billion 800 million 2010 2009 2008 respectively cash provided investing activities included proceeds deposits related asset sales 20 billion 2010 26 billion 2009 15 billion 2008 cash provided operating activities 2010 sufficient fund company’s 218 billion capital exploratory program pay 57 billion dividends shareholders repurchase 750 million common stock restricted cash 855 million 123 million associated various capitalinvestment projects december 31 2010 2009 respectively invested shortterm marketable securities recorded “deferred charges assets” consolidated balance sheet dividends paid common stockholders approximately 57 billion 2010 53 billion 2009 52 billion 2008 april 2010 company increased quarterly common stock dividend 59 percent 072 per share debt capital lease obligations total debt capital lease obligations 115 billion december 31 2010 105 billion yearend 2009 10 billion increase total debt capital lease obligations 2010 included issuance 125 billion taxexempt bonds partially offset decrease shortterm obligations company’s debt capital lease obligations due within one year consisting primarily commercial paper redeemable longterm obligations current portion longterm debt totaled 56 billion december 31 2010 46 billion yearend 2009 amount 54 billion 42 billion reclassified longterm end period respectively yearend 2010 settlement obligations expected require use working capital 2011 company intent ability evidenced committed credit facilities refinance longterm basis december 31 2010 company 60 billion committed credit facilities various major banks expiring may 2013 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2010 addition company automatic shelf registration statement expires march 2013 unspecified amount nonconvertible debt securities issued guaranteed company major debt rating agencies routinely evaluate company’s debt company’s cost borrowing increase decrease depending debt ratings company outstanding public bonds issued chevron corporation chevron corporation profit sharingsavings plan trust fund texaco capital inc union oil company california securities obligations guaranteed chevron corporation rated aa standard poor’s corporation aa1 moody’s investors service company’s us commercial paper rated a1 standard poor’s p1 moody’s ratings denote highquality investmentgrade securities company’s future debt level dependent primarily results operations capital program cash may generated asset dispositions based highquality debt ratings company believes substantial borrowing capacity meet unanticipated cash requirements company also modify capital spending plans periods low prices crude oil natural gas narrow margins refined products commodity fs12 capital exploratory expenditures chemicals provide flexibility continue paying common stock dividend maintain company’s highquality debt ratings common stock repurchase program july 2010 company terminated 15 billion share repurchase program initiated september 2007 share repurchases occurred 2010 program prior termination inception program company acquired 119 million shares cost 101 billion place board directors approved new ongoing share repurchase program set term monetary limits company expects repurchase 500 million 1 billion common shares per quarter prevailing prices permitted securities laws legal requirements subject market conditions factors company began purchases common stock fourth quarter december 31 2010 88 million shares purchased new program 750 million capital exploratory expenditures total expenditures 2010 218 billion including 14 billion company’s share equityaffiliate expenditures 2009 2008 expenditures 222 billion 228 billion respectively including company’s share affiliates’ expenditures 16 billion 23 billion respectively 2 billion extension upstream concession 2009 218 billion expenditures 2010 87 percent 189 billion related upstream activities approximately 80 percent expended upstream operations 2009 2008 international upstream accounted 82 percent worldwide upstream investment 2010 80 percent 2009 70 percent 2008 reflecting company’s continuing focus opportunities available outside united states company estimates 2011 capital exploratory expenditures 260 billion including 20 billion spending affiliates approximately 85 percent total 226 billion budgeted exploration produc tion activities 172 billion amount projects outside united states spending 2011 primarily focused major development projects angola australia brazil canada china nigeria thailand united kingdom us gulf mexico also included funding base business improvements focused exploration appraisal programs core hydrocarbon basins worldwide downstream spending 2011 estimated 29 billion 17 billion projects united states major capital outlays include projects construction refineries united states south korea investments technology power generation corporate businesses 2011 budgeted 500 million noncontrolling interests company noncontrolling interests 730 million 647 million december 31 2010 2009 respectively distributions noncontrolling interests totaled 72 million 71 million 2010 2009 respectively pension obligations 2010 company’s pension plan contributions 14 billion including 119 billion us plans 258 million international plans company estimates contributions 2011 approximately 950 million 650 million us plans 300 million international plans actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations refer also discussion pension accounting “critical accounting estimates assumptions” beginning page fs20 financial ratios financial ratios current ratio current assets divided current liabilities indicates company’s ability repay shortterm liabilities shortterm assets current ratio periods adversely affected fact chevron’s inventories valued lastin firstout basis yearend 2010 book value inventory lower replacement costs based average acquisition costs year approximately 70 billion fs13 management’s discussion analysis financial condition results operations interest coverage ratio income tax expense plus interest debt expense amortization capitalized interest less net income attributable noncontrolling interests divided beforetax interest costs ratio indicates company’s ability pay interest outstanding debt company’s interest coverage ratio 2010 higher 2009 due higher beforetax income company’s interest coverage ratio 2009 lower 2008 due lower beforetax income debt ratio total debt percentage total debt plus chevron corporation stockholders’ equity indicates company’s leverage decrease 2010 2009 due higher chevron corporation stockholders’ equity balance increase 2009 2008 primarily due increase debt guarantees offbalancesheet arrangements contractual obligations contingencies direct guarantee company’s guarantee approximately 600 million associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 million end 2010 company paid 48 million indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events subject indemnities must arisen prior december 2001 claims asserted february 2009 equilon indemnities must asserted later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments company posts assets collateral made payments indemnities amounts payable indemnities described preceding paragraph net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 million reached december 31 2009 indemnification agreement reaching 200 million obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity fs14 drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2011 172 billion 2012 41 billion 2013 35 billion 2014 31 billion 2015 30 billion 2016 77 billion portion commitments may ultimately shared project partners total payments agreements approximately 65 billion 2010 81 billion 2009 51 billion 2008 following table summarizes company’s significant contractual obligations contractual obligations1 excludes contributions pensions postretirement benefit plans information employee benefit plans contained note 21 beginning page fs52 include amounts related company’s income tax liabilities associated uncertain tax positions company unable make reasonable estimates periods liabilities may become payable company expect settlement liabilities material effect results operations consolidated financial position liquidity single period 54 billion shortterm debt company expects refinance included longterm debt repayment schedule reflects projected repayment entire amounts 20122013 period include obligations purchase company’s share natural gas liquids regasified natural gas associated operations 364 percentowned angola lng affiliate lng plant expected commence operations 2012 designed produce 52 million metric tons lng related natural gas liquids per year volumes prices associated purchase obligations neither fixed determinable financial derivative instruments market risk associated company’s portfolio financial derivative instruments discussed estimates financial exposure market risk discussed represent company’s projection future market changes actual impact future market changes could differ materially due factors discussed elsewhere report including set forth heading “risk factors” part item 1a company’s 2010 annual report form 10k derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries company also uses derivative commodity instruments limited trading purposes results activities material company’s financial position results operations cash flows 2010 company’s market exposure positions monitored managed daily basis internal risk control group accordance company’s risk management policies approved audit committee company’s board directors derivative commodity instruments used company’s risk management trading activities consist mainly futures options swap contracts traded new york mercantile exchange electronic platforms intercontinental exchange chicago mercantile exchange addition crude oil natural gas refined product swap contracts option contracts entered principally major financial institutions oil gas companies “overthecounter” markets virtually derivatives beyond designated normal purchase normal sale contracts recorded fair value consolidated balance sheet resulting gains losses reflected income fair values derived principally published market quotes independent thirdparty quotes change fair value chevron’s derivative commodity instruments 2010 quarterly average decrease 1 million total assets quarterly average increase 18 million total liabilities company uses valueatrisk var model estimate potential loss fair value single day effect adverse changes market conditions derivative commodity instruments held issued recorded balance sheet december 31 2010 derivative commodity instruments accordance accounting standards derivatives asc 815 var maximum loss exceeded within given probability confidence level given period time company’s var model uses monte carlo simulation method involves generating hypothetical scenarios specified probability distributions constructing full distribution portfolio’s potential values var model utilizes exponentially weighted moving average computing historical volatilities correlations 95 percent confidence level oneday holding period company’s 95 percent oneday var corresponds unrealized loss portfolio value would exceeded average one every 20 trading days portfolio held constant one day oneday holding period based assumption marketrisk positions liquidated hedged within one day hedging risk management company uses conventional exchangetraded instruments futures options well nonexchangetraded swaps liquidated hedged effectively within one day following table presents 95 percentoneday var company’s primary risk exposures area derivative commodity instruments december 31 2010 2009 fs15 management’s discussion analysis financial condition results operations foreign currency company may enter foreign currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments foreign currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open foreign currency derivative contracts december 31 2010 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps recorded fair value balance sheet resulting gains losses reflected income yearend 2010 company interest rate swaps transactions related parties chevron enters number business arrangements related parties principally equity affiliates arrangements include longterm supply offtake agreements longterm purchase agreements refer information note 12 consolidated financial statements page fs43 discussion management believes agreements negotiated terms consistent would negotiated unrelated party litigation contingencies mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party 19 pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable could material net income one period company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations conducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 million certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued report recommending court assess 189 billion would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 84 billion could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared con fs16 sultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16 billion 76 billion unjust enrichment assessed amount approximately 5 billion 38 billion next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remain unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron texpet filed arbitration claim september 2009 republic ecuador permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 permanent court arbitration issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal chevron expects continue seeking permanent injunctive relief monetary relief tribunal series recent us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil law suit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes award damages declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable february 8 2011 court issued temporary restraining order prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case march 8 2011 chevron’s motion preliminary injunction presently court february 14 2011 provincial court lago agrio rendered adverse judgment case provincial court rejected chevron’s defenses extent court addressed opinion judgment assesses approximately 86 billion damages 09 billion plaintiffs’ representatives also assesses additional amount approximately 86 billion punitive damages unless company provides public apology chevron continues believe court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron appeal decision ecuador chevron cannot predict timing ultimate outcome appeals process ecuador chevron continue vigorous defense imposition liability chevron substantial assets ecuador chevron would expect enforcement actions result judgment brought jurisdictions chevron expects contest actions ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated judgment 2008 engineer’s report september 2010 plaintiffs’ submission management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown fs17 management’s discussion analysis financial condition results operations magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies following table displays annual changes company’s beforetax environmental remediation reserves including federal superfund sites analogous sites state laws included 1507 million yearend 2010 reserve balance remediation activities approximately 182 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2010 185 million federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2010 environmental reserves balance 1322 million 814 million related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 508 million associated various sites international downstream 100 million upstream 329 million businesses 79 million liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2010 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties company records asset obligations legal obligation associated retirement longlived assets liability reasonably estimated asset retirement obligations include costs related environmental issues liability balance approximately 125 billion asset retirement obligations yearend 2010 related primarily upstream properties company’s ongoing operating assets refineries chemicals facilities provisions made exit cleanup costs may required assets reach end useful lives unless decision sell otherwise abandon facility made indeterminate settlement dates asset retirements prevent estimation fair value asset retirement obligation refer also note 25 page fs62 related company’s asset retirement obligations discussion “environmental matters” page fs19 fs18 income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs47 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity suspended wells company suspends costs exploratory wells pending final determination commercial potential related crude oil natural gas fields ultimate disposition well costs dependent results future drilling activity development decisions december 31 2010 company approximately 27 billion suspended exploratory wells included properties plant equipment increase 283 million 2009 balance reflected increase 317 million 2008 future trend company’s exploration expenses affected amounts associated well writeoffs including wells previously suspended pending determination whether well found reserves could classified proved effect exploration expenses future periods 27 billion suspended wells yearend 2010 uncertain pending future activities including normal project evaluation additional drilling refer note 19 beginning page fs50 additional discussion suspended wells equity redetermination crude oil natural gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 million possible maximum net amount could owed chevron estimated 150 million timing settlement exact amount within range estimates uncertain contingencies april 26 2010 california appeals court issued ruling related adequacy environmental impact report eir supporting issuance certain permits city richmond california replace upgrade certain facilities chevron’s refinery richmond settlement discussions plaintiffs case ended late fourth quarter 2010 company continues evaluate options going forward may include requesting city revise eir address issues identified court appeal actions management believes outcomes associated potential options project uncertain due uncertainty company’s future course action potential outcomes action combination actions management believe estimate financial effects ruling made time however company’s ultimate exposure may significant net income one future period chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods environmental matters virtually aspects businesses company engages subject various federal state local environmental health safety laws regulations regulatory requirements continue increase number complexity time govern manner company conducts operations also products sells costs complying laws regulations pertaining company operations products embedded normal costs business accidental leaks spills requiring cleanup may occur ordinary course business addition costs environmental protection associated ongoing operations products company may incur expenses corrective actions various owned previously owned facilities thirdpartyowned waste disposal sites used company obligation may arise operations closed sold nonchevron sites company products handled disposed expenditures fulfill obligations relate facilities sites past operations followed practices procedures considered acceptable time require investigative remedial work meet current standards using definitions guidelines established american petroleum institute chevron estimated worldwide environmental spending 2010 approximately 29 billion consolidated companies included expenditures approximately 14 billion environmental capital expenditures 15 billion costs associated prevention control abatement elimination hazardous substances pollutants operating closed divested sites abandonment restoration sites 2011 total worldwide environmental capital expenditures estimated 15 billion capital costs fs19 management’s discussion analysis financial condition results operations addition ongoing costs complying environmental regulations costs remediate previously contaminated sites possible predict certainty amount additional investments new existing facilities amounts incremental operating costs incurred future prevent control reduce eliminate releases hazardous materials environment comply existing new environmental laws regulations remediate restore areas damaged prior releases hazardous materials although costs may significant results operations single period company expect material effect company’s liquidity financial position critical accounting estimates assumptions management makes many estimates assumptions application generally accepted accounting principles gaap may material impact company’s consolidated financial statements related disclosures comparability information different reporting periods estimates assumptions affect reported amounts assets liabilities revenues expenses well disclosures contingent assets liabilities estimates assumptions based management’s experience information available prior issuance financial statements materially different results occur circumstances change additional information becomes known discussion section “critical” accounting estimates assumptions according disclosure guidelines securities exchange commission sec wherein 1 nature estimates assumptions material due levels subjectivity judgment necessary account highly uncertain matters susceptibility matters change 2 impact estimates assumptions company’s financial condition operating performance material besides meeting “critical” criteria company makes many accounting estimates assumptions preparing financial statements related disclosures although associated “highly uncertain matters” estimates assumptions also subject revision circumstances warrant materially different results may sometimes occur example recording deferred tax assets requires assessment accounting rules future realization associated tax benefits “more likely not” another example estimation crude oil natural gas reserves sec rules require “by analysis geosciences engineering data reserves estimated reasonable certainty economically producibleunder existing economic conditions” existing economic conditions include prices based average price 12month period prior end reporting period refer table v “reserve quantity information” beginning page fs71 changes estimates three years ending december 31 2010 table vii “changes standardized measure discounted future net cash flows proved reserves” page fs80 estimates provedreserve values three years ended december 31 2010 note 1 consolidated financial statements beginning page fs32 includes description “successful efforts” method accounting oil gas exploration production activities estimates crude oil natural gas reserves important timing expense recognition costs incurred discussion critical accounting policy “impairment properties plant equipment investments affiliates” beginning page fs22 includes reference conditions downward revisions provedreserve quantities could result impairments oil gas properties commentary read conjunction disclosures elsewhere discussion notes consolidated financial statements related estimates uncertainties contingencies new accounting standards significant accounting policies discussed note 1 consolidated financial statements beginning page fs32 development selection accounting estimates assumptions including deemed “critical” associated disclosures discussion discussed management audit committee board directors areas accounting associated “critical” estimates assumptions made company follows pension postretirement benefit plans determination pension plan obligations expense based number actuarial assumptions two critical assumptions expected longterm rate return plan assets discount rate applied pension plan obligations postretirement benefit opeb plans provide certain health care life insurance benefits qualifying retired employees funded critical assumptions determining opeb obligations expense discount rate assumed health care costtrend rates note 21 beginning page fs52 includes information funded status company’s pension opeb plans end 2010 2009 components pension opeb expense three years ending december 31 2010 underlying assumptions periods fs20 pension opeb expense reported consolidated statement income “operating expenses” “selling general administrative expenses” applies business segments yearend 2010 2009 funded status measured difference plan assets obligations company’s pension opeb plans recognized consolidated balance sheet differences related overfunded pension plans reported longterm asset “deferred charges assets” differences associated underfunded unfunded pension opeb plans reported “accrued liabilities” “reserves employee benefit plans” amounts yet recognized components pension opeb expense reported “accumulated comprehensive loss” estimate longterm rate return pension assets company uses process incorporates actual historical assetclass returns assessment expected future performance takes consideration external actuarial advice assetclass factors asset allocations periodically updated using pension plan assetliability studies determination company’s estimates longterm rates return consistent studies expected longterm rate return us pension plan assets account 70 percent company’s pension plan assets remained 78 percent since 2002 10 years ending december 31 2010 actual asset returns averaged 47 percent plan actual return 2010 116 percent associated broad recovery financial markets yearend marketrelated value assets major us pension plan used determination pension expense based market value preceding three months opposed maximum allowable period five years us accounting rules management considers threemonth period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2010 company selected 48 percent discount rate major us pension plan 50 percent opeb plan rates selected based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2010 discount rates end 2009 53 percent major us pension plan 58 percent company’s us opeb plan 63 percent end 2008 us pension opeb plans increase expected longterm return plan assets discount rate would reduce pension plan expense vice versa total pension expense 2010 11 billion indication sensitivity pension expense longterm rate return assumption 1 percent increase expected rate return assets company’s primary us pension plan would reduced total pension plan expense 2010 approximately 65 million 1 percent increase discount rate plan accounted 61 percent companywide pension obligation would reduced total pension plan expense 2010 approximately 140 million increase discount rate would decrease pension obligation thus changing funded status plan reported consolidated balance sheet total pension liability consolidated balance sheet december 31 2010 underfunded plans approximately 33 billion indication sensitivity pension liabilities discount rate assumption 025 percent increase discount rate applied company’s primary us pension plan would reduced plan obligation approximately 300 million would decreased plan’s underfunded status approximately 09 billion 06 billion plans would less underfunded discount rates increase actual rates return plan assets discount rates may vary significantly estimates unanticipated changes world’s financial markets 2010 company’s pension plan contributions 145 billion including 119 billion us plans 2011 company estimates contributions approximately 950 million actual contribution amounts dependent upon investment results changes pension obligations regulatory requirements economic factors additional funding may required investment returns insufficient offset increases plan obligations company’s opeb plans expense 2010 166 million total liability reflected unfunded status plans end 2010 36 billion indication discount rate sensitivity determination opeb expense 2010 1 percent increase discount rate company’s primary us opeb plan accounted 69 percent companywide opeb expense would decreased opeb expense approximately 15 million 025 percent increase discount rate plan accounted 85 percent companywide opeb liabilities would decreased total opeb liabilities end 2010 approximately 80 million main us postretirement medical plan annual increase company contributions limited 4 percent per year active employees retirees age 65 whose claims experiences combined rating purposes assumed health care costtrend rates start 8 percent 2011 gradually drop 5 percent 2018 beyond indication health care costtrend rate sensitivity determination opeb expense 2010 1 percent increase rates main us opeb plan accounted 85 percent companywide opeb liabilities would increased opeb expense 8 million differences various assumptions used determine expense funded status plan actual experience included benefit plan costs year difference occurs instead differences fs21 management’s discussion analysis financial condition results operations included actuarial gainloss unamortized amounts reflected “accumulated comprehensive loss” consolidated balance sheet refer note 21 beginning page fs52 information 67 billion beforetax actuarial losses recorded company december 31 2010 description method used amortize costs estimate costs recognized expense 2011 impairment properties plant equipment investments affiliates company assesses properties plant equipment ppe possible impairment whenever events changes circumstances indicate carrying value assets may recoverable indicators include changes company’s business plans changes commodity prices crude oil natural gas properties significant downward revisions estimated proved reserve quantities carrying value asset exceeds future undiscounted cash flows expected asset impairment charge recorded excess carrying value asset estimated fair value determination whether much asset impaired involves management estimates highly uncertain matters future commodity prices effects inflation technology improvements operating expenses production profiles outlook global regional market supplyanddemand conditions crude oil natural gas commodity chemicals refined products however impairment reviews calculations based assumptions consistent company’s business plans longterm investment decisions refer also discussion impairments properties plant equipment note 9 beginning page fs37 major individual impairments ppe investments recorded three years ending december 31 2010 sensitivity analysis impact earnings periods assumptions used impairment reviews impairment calculations practicable given broad range company’s ppe number assumptions involved estimates favorable changes assumptions might avoided need impair assets periods whereas unfavorable changes might caused additional unknown number assets become impaired investments common stock affiliates accounted equity method well investments securities equity investees reviewed impairment fair value investment falls company’s carrying value decline deemed temporary impairment charge recorded income statement difference investment’s carrying value estimated fair value time making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value differing assumptions could affect whether investment impaired period amount impairment subject sensitivity analysis time company performs impairment reviews determines whether writedown carrying value asset group required example significant downward revisions crude oil natural gas reserves made single field concession impairment review performed determine carrying value asset remains recoverable also expectation sale particular asset group period deemed likely impairment review performed estimated net proceeds exceed carrying value asset group impairment charge required calculations reviewed period asset group disposed assets impaired heldandused basis could possibly become impaired decision made sell assets would impaired classified heldforsale estimated proceeds sale less costs sell less assets’ associated carrying values goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount contingent losses management also makes judgments estimates recording liabilities claims litigation tax matters environmental remediation actual costs frequently vary estimates variety reasons example costs settlement claims litigation vary estimates based differing interpretations laws opinions culpability assessments amount damages similarly liabilities environmental remediation subject change changes laws regulations interpretation determination additional information extent nature site contamination improvements technology accounting rules liability generally recorded types contingencies management determines loss probable estimable company generally reports losses “operating expenses” “selling general administrative expenses” consolidated statement income exception fs22 handling income tax matters benefits recognized management determines tax position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction additional discussion income tax uncertainties refer note 15 beginning page fs47 refer also business segment discussions elsewhere section effect earnings losses associated certain litigation environmental remediation tax matters three years ended december 31 2010 estimate sensitivity earnings periods assumptions used recording liabilities practicable number contingencies must assessed number underlying assumptions wide range reasonably possible outcomes terms probability loss estimates loss new accounting standards transfers servicing asc 860 accounting transfers financial assets asu 200916 fasb issued asu 200916 december 2009 standard became effective company january 1 2010 asu 200916 changes companies account transfers financial assets eliminates concept qualifying specialpurpose entities adoption guidance effect company’s results operations financial position liquidity consolidation asc 810 improvements financial reporting enterprises involved variable interest entities asu 200917 fasb issued asu 200917 december 2009 standard became effective company january 1 2010 asu 200917 requires enterprise qualitatively assess primary beneficiary variableinterest entity vie must consolidated adoption standard impact company’s results operations financial position liquidity receivables asc 310 disclosures credit quality financing receivables allowance credit losses asu 201020 july 2010 fasb issued asu 201020 became effective company’s reporting december 31 2010 standard amends expands disclosure requirements credit quality financing receivables related allowance credit losses result amendments companies required disaggregate portfolio segment class financing receivable certain existing disclosures provide certain new disclosures financing receivables related allowance credit losses adoption standard change company’s existing disclosures fs23 quarterly results stock market data unaudited company’s common stock listed new york stock exchange trading symbol cvx february 18 2011 stockholders record numbered approximately 186000 restrictions company’s ability pay dividends fs24 management’s responsibility financial statements stockholders chevron corporation management chevron responsible preparing accompanying consolidated financial statements related information appearing report statements prepared accordance accounting principles generally accepted united states america fairly represent transactions financial position company financial statements include amounts based management’s best estimates judgment stated report included herein independent registered public accounting firm pricewaterhousecoopers llp audited company’s consolidated financial statements accordance standards public company accounting oversight board united states board directors chevron audit committee composed directors officers employees company audit committee meets regularly members management internal auditors independent registered public accounting firm review accounting internal control auditing financial reporting matters internal auditors independent registered public accounting firm free direct access audit committee without presence management’s report internal control financial reporting company’s management responsible establishing maintaining adequate internal control financial reporting term defined exchange act rule 13a15f company’s management including chief executive officer chief financial officer conducted evaluation effectiveness company’s internal control financial reporting based internal control integrated framework issued committee sponsoring organizations treadway commission based results evaluation company’s management concluded internal control financial reporting effective december 31 2010 effectiveness company’s internal control financial reporting december 31 2010 audited pricewaterhousecoopers llp independent registered public accounting firm stated report included herein february 24 2011 fs25 report independent registered public accounting firm stockholders board directors chevron corporation opinion accompanying consolidated balance sheet related consolidated statements income comprehensive income equity cash flows present fairly material respects financial position chevron corporation subsidiaries december 31 2010 december 31 2009 results operations cash flows three years period ended december 31 2010 conformity accounting principles generally accepted united states america addition opinion financial statement schedule listed index appearing item 15a2 presents fairly material respects information set forth therein read conjunction related consolidated financial statements also opinion company maintained material respects effective internal control financial reporting december 31 2010 based criteria established internal control integrated framework issued committee sponsoring organizations treadway commission coso company’s management responsible financial statements financial statement schedule maintaining effective internal control financial reporting assessment effectiveness internal control financial reporting included accompanying management’s report internal control financial reporting responsibility express opinions financial statements financial statement schedule company’s internal control financial reporting based integrated audits conducted audits accordance standards public company accounting oversight board united states standards require plan perform audits obtain reasonable assurance whether financial statements free material misstatement whether effective internal control financial reporting maintained material respects audits financial statements included examining test basis evidence supporting amounts disclosures financial statements assessing accounting principles used significant estimates made management evaluating overall financial statement presentation audit internal control financial reporting included obtaining understanding internal control financial reporting assessing risk material weakness exists testing evaluating design operating effectiveness internal control based assessed risk audits also included performing procedures considered necessary circumstances believe audits provide reasonable basis opinions company’s internal control financial reporting process designed provide reasonable assurance regarding reliability financial reporting preparation financial statements external purposes accordance generally accepted accounting principles company’s internal control financial reporting includes policies procedures pertain maintenance records reasonable detail accurately fairly reflect transactions dispositions assets company ii provide reasonable assurance transactions recorded necessary permit preparation financial statements accordance generally accepted accounting principles receipts expenditures company made accordance authorizations management directors company iii provide reasonable assurance regarding prevention timely detection unauthorized acquisition use disposition company’s assets could material effect financial statements inherent limitations internal control financial reporting may prevent detect misstatements also projections evaluation effectiveness future periods subject risk controls may become inadequate changes conditions degree compliance policies procedures may deteriorate spricewaterhousecoopers llp san francisco california february 24 2011 fs26 consolidated statement income millions dollars except pershare amounts see accompanying notes consolidated financial statements fs27 consolidated statement comprehensive income millions dollars see accompanying notes consolidated financial statements fs28 consolidated balance sheet millions dollars except pershare amounts see accompanying notes consolidated financial statements fs29 consolidated statement cash flows millions dollars see accompanying notes consolidated financial statements fs30 consolidated statement equity shares thousands amounts millions dollars see accompanying notes consolidated financial statements fs31 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies general upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations relate primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses additives fuels lubricant oils company’s consolidated financial statements prepared accordance accounting principles generally accepted united states america require use estimates assumptions affect assets liabilities revenues expenses reported financial statements well amounts included notes thereto including discussion disclosure contingent liabilities although company uses best estimates judgments actual results could differ estimates future confirming events occur nature company’s operations many countries operates subject company changing economic regulatory political conditions company believe vulnerable risk nearterm severe impact result concentration activities subsidiary affiliated companies consolidated financial statements include accounts controlled subsidiary companies 50 percentowned variableinterest entities company primary beneficiary undivided interests oil gas joint ventures certain assets consolidated proportionate basis investments advances affiliates company substantial ownership interest approximately 20 percent 50 percent company exercises significant influence control policy decisions accounted equity method part accounting company recognizes gains losses arise issuance stock affiliate results changes company’s proportionate share dollar amount affiliate’s equity currently income investments assessed possible impairment events indicate fair value investment may company’s carrying value condition deemed temporary carrying value investment written fair value amount writedown included net income making determination whether decline temporary company considers factors duration extent decline investee’s financial performance company’s ability intention retain investment period sufficient allow anticipated recovery investment’s market value new cost basis investments equity investees changed subsequent recoveries fair value differences company’s carrying value equity investment underlying equity net assets affiliate assigned extent practicable specific assets liabilities based company’s analysis various factors giving rise difference appropriate company’s share affiliate’s reported earnings adjusted quarterly reflect difference allocated values affiliate’s historical book values derivatives majority company’s activity derivative commodity instruments intended manage financial risk posed physical transactions derivative activity generally limited large discrete infrequently occurring transactions company may elect apply fair value cash flow hedge accounting similar derivative instruments generally shortterm nature contracts limited use company apply hedge accounting changes fair value contracts reflected current income company’s commodity trading activity gains losses derivative instruments reported current income company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income chevron party master netting arrangements fair value receivable payable amounts recognized derivative instruments executed counterparty generally offset balance sheet shortterm investments shortterm investments classified available sale highly liquid debt securities investments part company’s cash management portfolio original maturities three months less reported “cash equivalents” bank time deposits maturities greater 90 days reported “time deposits” balance shortterm investments reported “marketable securities” markedtomarket unrealized gains losses included “other comprehensive income” inventories crude oil petroleum products chemicals inventories generally stated cost using lastin firstout fs32 note 1 summary significant accounting policies continued lifo method aggregate costs market “materials supplies other” inventories generally stated average cost properties plant equipment successful efforts method used crude oil natural gas exploration production activities costs development wells related plant equipment proved mineral interests crude oil natural gas properties related asset retirement obligation aro assets capitalized costs exploratory wells capitalized pending determination whether wells found proved reserves costs wells assigned proved reserves remain capitalized costs also capitalized exploratory wells found crude oil natural gas reserves even reserves cannot classified proved drilling completed provided exploratory well found sufficient quantity reserves justify completion producing well company making sufficient progress assessing reserves economic operating viability project exploratory wells costs expensed refer note 19 beginning page fs50 additional discussion accounting suspended exploratory well costs longlived assets held used including proved crude oil natural gas properties assessed possible impairment comparing carrying values associated undiscounted future net beforetax cash flows events trigger assessments possible impairments include writedowns proved reserves based field performance significant decreases market value asset significant change extent manner use physical change asset morelikelythannot expectation longlived asset group sold otherwise disposed significantly sooner end previously estimated useful life impaired assets written estimated fair values generally discounted future net beforetax cash flows proved crude oil natural gas properties united states company generally performs impairment review individual field basis outside united states reviews performed country concession development area field basis appropriate downstream impairment reviews generally done basis refinery plant marketing area marketing assets country impairment amounts recorded incremental “depreciation depletion amortization” expense longlived assets held sale evaluated possible impairment comparing carrying value asset fair value less cost sell net book value exceeds fair value less cost sell asset considered impaired adjusted lower value refer note 9 beginning page fs37 relating fair value measurements required accounting standards asset retirement obligations accounting standards codification asc 410 fair value liability aro recorded asset liability legal obligation associated retirement longlived asset amount reasonably estimated refer also note 25 page fs62 relating aros depreciation depletion capitalized costs proved crude oil natural gas producing properties except mineral interests expensed using unitofproduction method generally individual field proved developed reserves produced depletion expenses capitalized costs proved mineral interests recognized using unitofproduction method individual field related proved reserves produced periodic valuation provisions impairment capitalized costs unproved mineral interests expensed depreciation depletion expenses mining assets determined using unitofproduction method proved reserves produced capitalized costs plant equipment depreciated amortized estimated useful lives general decliningbalance method used depreciate plant equipment united states straightline method generally used depreciate international plant equipment amortize capitalized leased assets gains losses recognized normal retirements properties plant equipment subject composite group amortization depreciation gains losses abnormal retirements recorded expenses sales “other income” expenditures maintenance including planned major maintenance projects repairs minor renewals maintain facilities operating condition generally expensed incurred major replacements renewals capitalized goodwill resulting business combination subject amortization required accounting standards goodwill asc 350 company tests goodwill reporting unit level impairment annual basis annual tests event occurs circumstances change would likely reduce fair value reporting unit carrying amount environmental expenditures environmental expenditures relate ongoing operations conditions caused past operations expensed expenditures create future benefits contribute future revenue generation capitalized liabilities related future remediation costs recorded environmental assessments cleanups probable costs reasonably estimated company’s us canadian marketing facilities accrual fs33 notes consolidated financial statements millions dollars except pershare amounts note 1 summary significant accounting policies continued based part probability future remediation commitment required crude oil natural gas mineralproducing properties liability aro made following accounting standards asset retirement environmental obligations refer note 25 page fs62 discussion company’s aros federal superfund sites analogous sites state laws company records liability designated share probable estimable costs probable amounts potentially responsible parties mandated regulatory agencies parties able pay respective shares gross amount environmental liabilities based company’s best estimate future costs using currently available technology applying current regulations company’s internal environmental policies future amounts discounted recoveries reimbursements recorded assets receipt reasonably assured currency translation us dollar functional currency substantially company’s consolidated operations equity affiliates operations gains losses currency remeasurement included current period income cumulative translation effects entities consolidated affiliated using functional currencies us dollar included “currency translation adjustment” consolidated statement equity revenue recognition revenues associated sales crude oil natural gas coal petroleum chemicals products sources recorded title passes customer net royalties discounts allowances applicable revenues natural gas production properties chevron interest producers generally recognized entitlement method excise valueadded similar taxes assessed governmental authority revenueproducing transaction seller customer presented gross basis associated amounts shown footnote consolidated statement income page fs27 purchases sales inventory counterparty entered contemplation one another including buysell arrangements combined recorded net basis reported “purchased crude oil products” consolidated statement income stock options sharebased compensation company issues stock options sharebased compensation employees accounts transactions accounting standards sharebased compensation asc 718 equity awards stock options total compensation cost based grant date fair value liability awards stock appreciation rights total compensation cost based settlement value company recognizes stockbased compensation expense awards service period required earn award shorter vesting period time period employee becomes eligible retain award retirement stock options stock appreciation rights granted company’s longterm incentive plan graded vesting provisions onethird award vests first second third anniversaries date grant company amortizes graded awards straightline basis note 2 agreement acquire atlas energy inc november 2010 chevron announced plans acquire atlas energy inc acquisition completed february 2011 4470 including assumed debt acquisition accounted business combination asc 805 atlas holds one premier acreage positions marcellus shale concentrated southwestern pennsylvania note 3 noncontrolling interests company adopted accounting standards noncontrolling interests asc 810 consolidated financial statements effective january 1 2009 retroactive earliest period presented ownership interests company’s subsidiaries held parties parent presented separately parent’s equity consolidated balance sheet amount consolidated net income attributable parent noncontrolling interests presented face consolidated statement income term “earnings” defined “net income attributable chevron corporation” activity equity attributable noncontrolling interests 2010 2009 2008 follows fs34 note 4 information relating consolidated statement cash flows accordance accounting standards cashflow classifications stock options asc 718 “net decrease increase operating working capital” includes reductions 67 25 106 excess income tax benefits associated stock options exercised 2010 2009 2008 respectively amounts offset equal amount “net purchases sales treasury shares” “net purchases sales treasury shares” represents cost common shares purchased less cost shares issued sharebased compensation plans purchases totaled 775 6 8011 2010 2009 2008 respectively purchases 2010 2008 included shares purchased company’s common stock repurchase programs 2010 “net purchases sales shortterm investments” consist restricted cash associated capitalinvestment projects company’s pascagoula el segundo refineries angola liquefied natural gas project invested shortterm securities reclassified “cash equivalents” “deferred charges assets” consolidated balance sheet company issued 1250 350 2010 2009 respectively tax exempt bonds source funds us refinery projects consolidated statement cash flows excludes changes consolidated balance sheet affect cash 2008 “net purchases sales treasury shares” excludes 680 treasury shares acquired exchange us upstream property 280 cash carrying value property “properties plant equipment” consolidated balance sheet significant 2008 2450 increase “accrued liabilities” corresponding increase “properties plant equipment cost” considered noncash transactions excluded “net decrease increase operating working capital” “capital expenditures” 2009 payments related “accrued liabilities” excluded “net decrease increase operating working capital” reported “capital expenditures” amount related upstream operating agreements outside united states “capital expenditures” 2008 excludes 1400 increase “properties plant equipment” related acquisition additional interest equity affiliate required change consolidated method accounting investment 2008 addition offset primarily reductions “investments advances” working capital increase “noncurrent deferred income tax” liabilities refer also note 25 page fs62 discussion revisions company’s aros also involve cash receipts payments three years ending december 31 2010 major components “capital expenditures” reconciliation amount reported capital exploratory expenditures including equity affiliates presented following table fs35 notes consolidated financial statements millions dollars except pershare amounts note 5 summarized financial data chevron usa inc chevron usa inc cusa major subsidiary chevron corporation cusa subsidiaries manage operate chevron’s us businesses assets include related exploration production crude oil natural gas natural gas liquids associated refining marketing supply distribution products derived petroleum excluding regulated pipeline operations chevron cusa also holds company’s investment chevron phillips chemical company llc joint venture accounted using equity method 2008 chevron implemented legal reorganizations certain chevron subsidiaries transferred assets cusa summarized financial information cusa consolidated subsidiaries presented table gives retroactive effect reorganizations occurred january 1 2008 however financial information following table may reflect financial position operating results future historical results periods presented reorganization actually occurred date summarized financial information cusa consolidated subsidiaries follows “net income attributable cusa” year ended december 31 2008 adjusted immaterial amount associated allocation incometax liabilities among chevron corporation subsidiaries note 6 summarized financial data chevron transport corporation ltd chevron transport corporation ltd ctc incorporated bermuda indirect wholly owned subsidiary chevron corporation ctc principal operator chevron’s international tanker fleet engaged marine transportation crude oil refined petroleum products ctc’s shipping revenue derived providing transportation services chevron companies chevron corporation fully unconditionally guaranteed subsidiary’s obligations connection certain debt securities issued third party summarized financial information ctc consolidated subsidiaries follows restrictions ctc’s ability pay dividends make loans advances december 31 2010 note 7 summarized financial data tengizchevroil llp chevron 50 percent equity ownership interest tengizchevroil llp tco refer note 12 page fs43 discussion tco operations summarized financial information 100 percent tco presented following table fs36 note 8 lease commitments certain noncancelable leases classified capital leases leased assets included part “properties plant equipment cost” consolidated balance sheet leasing arrangements involve tanker charters crude oil production processing equipment service stations office buildings facilities leases classified operating leases capitalized payments leases recorded expense details capitalized leased assets follows rental expenses incurred operating leases 2010 2009 2008 follows contingent rentals based factors passage time principally sales volumes leased service stations certain leases include escalation clauses adjusting rentals reflect changes price indices renewal options ranging 25 years options purchase leased property end initial renewal lease period fair market value specified amount time december 31 2010 estimated future minimum lease payments net noncancelable sublease rentals operating capital leases inception noncancelable term one year follows note 9 fair value measurements accounting standards fair value measurement asc 820 establish framework measuring fair value stipulate disclosures fair value measurements standards apply recurring nonrecurring financial nonfinancial assets liabilities require permit fair value measurements among required disclosures fair value hierarchy inputs company uses value asset liability three levels fair value hierarchy described follows level 1 quoted prices unadjusted active markets identical assets liabilities company level 1 inputs include exchangetraded futures contracts parties willing transact exchangequoted price marketable securities actively traded level 2 inputs level 1 observable either directly indirectly company level 2 inputs include quoted prices similar assets liabilities prices obtained thirdparty broker quotes prices corroborated observable inputs substantially complete term contract level 3 unobservable inputs company use level 3 inputs recurring fair value measurements level 3 inputs may required determination fair value associated certain nonrecurring measurements nonfinancial assets liabilities 2010 company used level 3 inputs determine fair value certain nonrecurring nonfinancial assets fs37 notes consolidated financial statements millions dollars except pershare amounts note 9 fair value measurements continued fair value hierarchy recurring assets liabilities measured fair value december 31 2010 december 31 2009 follows assets liabilities measured fair value recurring basis marketable securities company calculates fair value marketable securities based quoted market prices identical assets liabilities fair values reflect cash would received instruments sold december 31 2010 derivatives company records derivative instruments commodity derivative contracts designated normal purchase normal sale consolidated balance sheet fair value virtually offsetting amount consolidated statement income derivatives identical similar provisions contracts publicly traded regular basis company uses market values publicly traded instruments input fair value calculations company’s derivative instruments principally include crude oil natural gas refined product futures swaps options forward contracts derivatives classified level 1 include futures swaps options contracts traded active markets new york mercantile exchange derivatives classified level 2 include swaps options forward contracts principally financial institutions oil gas companies fair values obtained thirdparty broker quotes industry pricing services exchanges company obtains multiple sources pricing information level 2 instruments since pricing information generated observable market data historically consistent company materially adjust information company incorporates internal review evaluation assessment procedures including comparison level 2 fair values derived company’s internally developed ward curves sample basis pricing information document reasonable logical supportable fair value determinations proper level classification impairments “properties plant equipment” accordance accounting standard impairment disposal longlived assets asc 360 2010 2009 longlived assets “held used” carrying amounts 142 949 written fair values 57 490 resulting beforetax losses 85 459 respectively fair values determined internal cash flow models using discount rates consistent used company evaluate cash flows assets similar nature longlived assets “held sale” carrying amounts 49 160 written fair value 13 68 resulting beforetax loss 36 92 2010 2009 respectively fair values determined based bids received prospective buyers internal cashflow models consistent used company evaluate cash flows assets similar nature impairments “investments advances” accordance accounting standards equity method accounting asc 323 cost method accounting asc 325 2010 2009 investments carrying amounts 15 81 written fair values 0 39 resulting beforetax losses 15 42 respectively fair values determined using discount rates consistent used company evaluate cash flows investments similar nature fs38 note 9 fair value measurements continued fair value hierarchy nonrecurring assets liabilities measured fair value 2010 presented following table assets liabilities measured fair value nonrecurring basis assets liabilities required measured fair value company holds cash equivalents bank time deposits us nonus portfolios instruments classified cash equivalents primarily bank time deposits maturities 90 days less money market funds “cash equivalents” carryingfair values 14060 8716 december 31 2010 december 31 2009 respectively instruments held “time deposits” bank time deposits maturities greater 90 days carryingfair values 2855 december 31 2010 fair values cash equivalents bank time deposits reflect cash would received paid instruments settled yearend “cash equivalents” include investments carryingfair value 855 123 december 31 2010 december 31 2009 respectively investments restricted funds related international upstream development project us refinery projects reported “deferred charges assets” consolidated balance sheet longterm debt 5636 5705 estimated fair values 6311 6229 december 31 2010 december 31 2009 respectively carrying values shortterm financial assets liabilities balance sheet approximate fair values fair values financial instruments end 2010 2009 material note 10 financial derivative instruments derivative commodity instruments chevron exposed market risks related price volatility crude oil refined products natural gas natural gas liquids liquefied natural gas refinery feedstocks company uses derivative commodity instruments manage exposures portion activity including firm commitments anticipated transactions purchase sale storage crude oil refined products natural gas natural gas liquids feedstock company refineries time company also uses derivative commodity instruments limited trading purposes company’s derivative commodity instruments principally include crude oil natural gas refined product futures swaps options forward contracts none company’s derivative instruments designated hedging instrument although certain company’s affiliates make designation company’s derivatives material company’s financial position results operations liquidity company believes material market credit risks operations financial position liquidity result commodity derivative activities company uses international swaps derivatives association agreements govern derivative contracts certain counterparties mitigate credit risk depending nature derivative transactions bilateral collateral arrangements may also required company engaged one outstanding derivative transaction counterparty also legally enforceable netting agreement counterparty net marktomarket exposure represents netting positive negative exposures counterparty reasonable measure company’s credit risk exposure company also uses netting agreements certain counterparties conducts significant transactions mitigate credit risk fs39 notes consolidated financial statements millions dollars except pershare amounts note 10 financial derivative instruments continued derivative instruments measured fair value december 31 2010 december 31 2009 december 31 2008 classification consolidated balance sheet consolidated statement income follows consolidated balance sheet fair value derivatives designated hedging instruments consolidated statement income effect derivatives designated hedging instruments foreign currency company may enter currency derivative contracts manage foreign currency exposures include revenue anticipated purchase transactions including foreign currency capital expenditures lease commitments currency derivative contracts recorded fair value balance sheet resulting gains losses reflected income open currency derivative contracts december 31 2010 2009 interest rates company may enter interest rate swaps time part overall strategy manage interest rate risk debt interest rate swaps related portion company’s fixedrate debt may accounted fair value hedges interest rate swaps related floatingrate debt recorded fair value balance sheet resulting gains losses reflected income yearend 2010 2009 company interest rate swaps concentrations credit risk company’s financial instruments exposed concentrations credit risk consist primarily cash equivalents time deposits marketable securities derivative financial instruments trade receivables company’s shortterm investments placed wide array financial institutions high credit ratings investment policies limit company’s exposure credit risk concentrations credit risk similar policies diversification creditworthiness applied company’s counterparties derivative instruments trade receivable balances reflecting company’s diversified sources revenue dispersed among company’s broad customer base worldwide result company believes concentrations credit risk limited company routinely assesses financial strength customers financial strength customer considered sufficient requiring letters credit principal method used support sales customers fs40 note 11 operating segments geographic data although subsidiary chevron responsible affairs chevron corporation manages investments subsidiaries affiliates investments grouped two business segments upstream downstream representing company’s “reportable segments” “operating segments” defined accounting standards segment reporting asc 280 upstream operations consist primarily exploring developing producing crude oil natural gas liquefaction transportation regasification associated liquefied natural gas lng transporting crude oil major international oil export pipelines processing transporting storage marketing natural gas gastoliquids project downstream operations consist primarily refining crude oil petroleum products marketing crude oil refined products transporting crude oil refined products pipeline marine vessel motor equipment rail car manufacturing marketing commodity petrochemicals plastics industrial uses fuel lubricant additives activities company include mining operations power generation businesses worldwide cash management debt financing activities corporate administrative functions insurance operations real estate activities energy services alternative fuels technology segments separately managed investment purposes structure includes “segment managers” report company’s “chief operating decision maker” codm terms defined asc 280 codm company’s executive committee excom committee senior officers includes chief executive officer excom reports board directors chevron corporation operating segments represent components company described accounting standards segment reporting asc 280 engage activities revenues earned expenses incurred b whose operating results regularly reviewed codm makes decisions resources allocated segments assesses performance c discrete financial information available segment managers reportable segments directly accountable maintain regular contact company’s codm discuss segment’s operating activities financial performance codm approves annual capital exploratory budgets reportable segment level well reviews capital exploratory funding major projects approves major changes annual capital exploratory budgets however businessunit managers within operating segments directly responsible decisions relating project implementation matters connected daily operations company officers members excom also individual management responsibilities participate committees purposes acting codm activities reported chevron’s upstream downstream operating segments changed effective january 1 2010 chemicals businesses reported part downstream segment addition company’s significant upstreamenabling operations primarily gastoliquids project major international export pipelines reclassified downstream segment upstream segment prior period information report revised conform 2010 presentation company’s primary country operation united states america country domicile components company’s operations reported “international” outside united states segment earnings company evaluates performance operating segments aftertax basis without considering effects debt financing interest expense investment interest income managed company worldwide basis corporate administrative costs assets allocated operating segments however operating segments billed direct use corporate services nonbillable costs remain corporate level “all other” earnings major operating area presented following table fs41 notes consolidated financial statements millions dollars except pershare amounts note 11 operating segments geographic data continued segment assets segment assets include intercompany investments intercompany receivables segment assets yearend 2010 2009 follows “all other” assets consist primarily worldwide cash equivalents time deposits marketable securities real estate energy services information systems mining operations power generation businesses alternative fuels technology companies assets corporate administrative functions segment sales operating revenues operating segment sales operating revenues including internal transfers years 2010 2009 2008 presented table right products transferred operating segments internal product values approximate market prices revenues upstream segment derived primarily production sale crude oil natural gas well sale thirdparty production natural gas revenues downstream segment derived refining marketing petroleum products gasoline jet fuel gas oils lubricants residual fuel oils products derived crude oil segment also generates revenues manufacture sale additives fuels lubricant oils transportation trading refined products crude oil natural gas liquids “all other” activities include revenues mining operations power generation businesses insurance operations real estate activities technology companies united states single country accounted 10 percent company’s total sales operating revenues 2010 2009 2008 segment information additional information segmentation major equity affiliates contained note 12 beginning page fs43 information related properties plant equipment segment contained note 13 page fs45 fs42 note 12 investments advances equity earnings together investments advances companies accounted using equity method investments accounted cost shown following table certain equity affiliates chevron pays share income taxes directly affiliates equity earnings include taxes reported consolidated statement income “income tax expense” descriptions major affiliates including significant differences company’s carrying value investments underlying equity net assets affiliates follows tengizchevroil chevron 50 percent equity ownership interest tengizchevroil tco joint venture formed 1993 develop tengiz korolev crude oil fields kazakhstan 40year period december 31 2010 company’s carrying value investment tco 190 higher amount underlying equity tco’s net assets difference results chevron acquiring portion interest tco value greater underlying book value portion tco’s net assets see note 7 page fs36 summarized financial information 100 percent tco petropiar chevron 30 percent interest petropiar joint stock company formed 2008 operate hamaca heavyoil production upgrading project located venezuela’s orinoco belt 25year contract term prior formation petropiar chevron 30 percent interest hamaca project december 31 2010 company’s carrying value investment petropiar approximately 190 less amount underlying equity petropiar’s net assets difference represents excess chevron’s underlying equity petropiar’s net assets net book value assets contributed venture caspian pipeline consortium chevron 15 percent interest caspian pipeline consortium variable interest entity provides critical export route crude oil tco karachaganak company joined consortium 1997 investments advances totaling 974 includes long term loans 1046 yearend 2010 loans provided fund 30 percent pipeline construction company primary beneficiary consortium direct activities consortium receives proportionate share financial returns petroboscan chevron 39 percent interest petroboscan joint stock company formed 2006 operate boscan field venezuela 2026 chevron previously operated field operating service agreement december 31 2010 company’s carrying value investment petroboscan approximately 250 higher amount underlying equity petroboscan’s net assets difference reflects excess net book value assets contributed chevron underlying equity petroboscan’s net assets angola lng ltd chevron 36 percent interest angola lng ltd process liquefy natural gas produced angola delivery international markets fs43 notes consolidated financial statements millions dollars except pershare amounts note 12 investments advances continued gs caltex corporation chevron owns 50 percent gs caltex corporation joint venture gs holdings joint venture imports refines markets petroleum products petrochemicals predominantly south korea chevron phillips chemical company llc chevron owns 50 percent chevron phillips chemical company llc half owned conocophillips corporation star petroleum refining company ltd chevron 64 percent equity ownership interest star petroleum refining company ltd sprc owns star refinery thailand ptt public company limited owns remaining 36 percent sprc caltex australia ltd chevron 50 percent equity ownership interest caltex australia ltd cal remaining 50 percent cal publicly owned december 31 2010 fair value chevron’s share cal common stock approximately 1970 colonial pipeline company october 2010 company sold 234 percent equity interest colonial pipeline company information “sales operating revenues” consolidated statement income includes 13672 10391 15390 affiliated companies 2010 2009 2008 respectively “purchased crude oil products” includes 5559 4631 6850 affiliated companies 2010 2009 2008 respectively “accounts notes receivable” consolidated balance sheet includes 1718 1125 due affiliated companies december 31 2010 2009 respectively “accounts payable” includes 377 345 due affiliated companies december 31 2010 2009 respectively following table provides summarized financial information 100 percent basis equity affiliates well chevron’s total share includes chevron loans affiliates 1543 2422 2820 december 31 2010 2009 2008 respectively fs44 note 13 properties plant equipment1 note 14 litigation mtbe chevron many companies petroleum industry used methyl tertiary butyl ether mtbe gasoline additive chevron party 19 pending lawsuits claims majority involve numerous petroleum marketers refiners resolution lawsuits claims may ultimately require company correct ameliorate alleged effects environment prior release mtbe company parties additional lawsuits claims related use mtbe including personalinjury claims may filed future company’s ultimate exposure related pending lawsuits claims determinable could material net income one period company longer uses mtbe manufacture gasoline united states ecuador chevron defendant civil lawsuit superior court nueva loja lago agrio ecuador brought may 2003 plaintiffs claim representatives certain residents area oil production consortium formerly operations lawsuit alleges damage environment oil exploration production operations seeks unspecified damages fund environmental remediation restoration alleged environmental harm plus health monitoring program 1992 texaco petroleum company texpet subsidiary texaco inc minority member consortium petroecuador ecuadorian stateowned oil company majority partner since 1990 operations con ducted solely petroecuador conclusion consortium following independent thirdparty environmental audit concession area texpet entered formal agreement republic ecuador petroecuador texpet remediate specific sites assigned government proportion texpet’s ownership share consortium pursuant agreement texpet conducted threeyear remediation program cost 40 certifying sites properly remediated government granted texpet related corporate entities full release environmental liability arising consortium operations based history described chevron believes lawsuit lacks legal factual merit matters law company believes first court lacks jurisdiction chevron second law plaintiffs bring action enacted 1999 cannot applied retroactively third claims barred statute limitations ecuador fourth lawsuit also barred releases liability previously given texpet republic ecuador petroecuador pertinent provincial municipal governments regard facts company believes evidence confirms texpet’s remediation properly conducted remaining environmental damage reflects petroecuador’s failure timely fulfill legal obligations petroecuador’s conduct since assuming full control operations 2008 mining engineer appointed court identify determine cause environmental damage specify steps needed remediate issued fs45 notes consolidated financial statements millions dollars except pershare amounts note 14 litigation continued report recommending court assess 18900 would according engineer provide financial compensation purported damages including wrongful death claims pay among items environmental remediation health care systems additional infrastructure petroecuador engineer’s report also asserted additional 8400 could assessed chevron unjust enrichment 2009 following disclosure chevron evidence judge participated meetings businesspeople individuals holding government officials discussed case likely outcome judge presiding case recused 2010 chevron moved strike mining engineer’s report dismiss case based evidence obtained discovery united states indicating report prepared consultants plaintiffs presented mining engineer’s independent impartial work showing evidence misconduct august 2010 judge issued order stating bound mining engineer’s report requiring parties provide positions damages within 45 days chevron subsequently petitioned recusal judge claiming disregarded evidence fraud misconduct failed rule number motions within statutory time requirement september 2010 chevron submitted position damages asserting amount assessed plaintiffs’ submission relied part mining engineer’s report took position damages approximately 16000 76000 unjust enrichment assessed amount approximately 5000 38000 next day judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron petitioned order declared nullity light chevron’s prior recusal petition procedural evidentiary matters remain unresolved october 2010 chevron’s motion recuse judge granted new judge took charge case revoked prior judge’s order closing evidentiary phase case december 17 2010 judge issued order closing evidentiary phase case notifying parties requested case file could prepare judgment chevron texpet filed arbitration claim september 2009 republic ecuador permanent court arbitration hague rules united nations commission international trade law claim alleges violations republic ecuador’s obligations united statesecuador bilateral investment treaty bit breaches settlement release agreements republic ecuador texpet described investment agreements protected bit arbitration chevron texpet seeking relief republic ecuador including declaration judgment chevron lago agrio litigation constitutes violation ecuador’s obligations bit february 9 2011 permanent court arbitration issued order interim measures requiring republic ecuador take measures disposal suspend cause suspended enforcement recognition within without ecuador judgment chevron lago agrio case pending order tribunal chevron expects continue seeking permanent injunctive relief monetary relief tribunal series recent us court proceedings initiated chevron obtain discovery relating lago agrio litigation bit arbitration chevron obtained evidence believes shows pattern fraud collusion corruption misconduct part several lawyers consultants others acting lago agrio plaintiffs february 2011 chevron filed civil lawsuit federal district court southern district new york lago agrio plaintiffs several lawyers consultants supporters alleging violations racketeer influenced corrupt organizations act state laws civil lawsuit chevron seeking relief includes award damages declaration judgment chevron lago agrio litigation result fraud unlawful conduct therefore unenforceable february 8 2011 court issued temporary restraining order prohibiting lago agrio plaintiffs persons acting concert taking action furtherance recognition enforcement judgment chevron lago agrio case march 8 2011 chevron’s motion preliminary injunction presently court february 14 2011 provincial court lago agrio rendered adverse judgment case provincial court rejected chevron’s defenses extent court addressed opinion judgment assesses approximately 8600 damages 900 plaintiffs’ representatives also assesses additional amount approximately 8600 punitive damages unless company provides public apology chevron continues believe court’s judgment illegitimate unenforceable ecuador united states countries company also believes judgment product fraud contrary legitimate scientific evidence chevron appeal decision ecuador chevron cannot predict timing ultimate outcome appeals process ecuador chevron continue vigorous defense imposition liability chevron substantial assets ecuador chevron would expect enforcement actions result judgment brought jurisdictions chevron expects contest actions fs46 note 14 litigation continued ultimate outcome foregoing matters including financial effect chevron remains uncertain management believe estimate reasonably possible loss range loss made case due defects associated judgment 2008 engineer’s report september 2010 plaintiffs’ submission management believe documents utility calculating reasonably possible loss range loss moreover highly uncertain legal environment surrounding case provides basis management estimate reasonably possible loss range loss note 15 taxes income taxes 2010 beforetax income us operations including related corporate charges 6528 compared beforetax income 1310 10765 2009 2008 respectively international operations beforetax income 25527 17218 32292 2010 2009 2008 respectively us federal income tax expense reduced 162 204 198 2010 2009 2008 respectively business tax credits reconciliation us statutory federal income tax rate company’s effective income tax rate explained following table company’s effective tax rate decreased 430 percent 2009 403 percent 2010 rate lower 2010 2009 primarily due international upstream impacts lower effective tax rate international upstream 2010 primarily driven increased utilization tax credits greater impact rate onetime deferred tax benefits relatively low tax rates asset sales 2009 also smaller portion company income earned higher tax rate international upstream jurisdictions 2010 2009 finally foreign currency remeasurement impacts caused reduction effective tax rate periods company records deferred taxes taxjurisdiction basis classifies net amounts current noncurrent based balance sheet classification related assets liabilities reported deferred tax balances composed following deferred tax liabilities end 2010 increased almost 1400 yearend 2009 increase primarily related increased temporary differences property plant equipment deferred tax assets increased approximately 700 2010 increases primarily related additional foreign tax credits arising earnings hightaxrate international jurisdictions substantially offset valuation allowances increased temporary differences asset retirement obligations environmental reserves employee benefits effects partially offset reductions deferred credits resulting primarily usage tax benefits international tax jurisdictions overall valuation allowance relates deferred tax assets foreign tax credit carryforwards tax loss carryforwards temporary differences reduces deferred tax assets amounts management’s assessment likely realized tax loss carryforwards fs47 notes consolidated financial statements millions dollars except pershare amounts note 15 taxes continued exist many international jurisdictions whereas tax loss carryforwards expiration date others expire various times 2011 2036 foreign tax credit carryforwards 6669 expire 2011 2020 december 31 2010 2009 deferred taxes classified consolidated balance sheet follows income taxes accrued unremitted earnings international operations intended reinvested indefinitely undistributed earnings international consolidated subsidiaries affiliates deferred income tax provision made possible future remittances totaled 21347 december 31 2010 amount represents earnings reinvested part company’s ongoing international business practicable estimate amount taxes might payable eventual remittance earnings intended reinvested indefinitely end 2010 deferred income taxes recorded undistributed earnings certain international operations company longer intends indefinitely reinvest earnings company anticipate incurring significant additional taxes remittances earnings indefinitely reinvested uncertain income tax positions accounting standards uncertainty income taxes asc 74010 company recognizes tax benefit financial statements uncertain tax position management’s assessment position “more likely not” ie likelihood greater 50 percent allowed tax jurisdiction based solely technical merits position term “tax position” accounting standards income taxes asc 7401020 refers position previously filed tax return position expected taken future tax return reflected measuring current deferred income tax assets liabilities interim annual periods following table indicates changes company’s unrecognized tax benefits years ended december 31 2010 2009 2008 term “unrecognized tax benefits” accounting standards income taxes asc 7401020 refers differences tax position taken expected taken tax return benefit measured recognized financial statements interest penalties included approximately 80 percent 3507 unrecognized tax benefits december 31 2010 would impact effective tax rate subsequently recognized certain unrecognized tax benefits relate tax carryforwards may require full valuation allowance time recognition tax positions chevron subsidiaries affiliates subject income tax audits many tax jurisdictions throughout world company’s major tax jurisdictions examinations tax returns certain prior tax years completed december 31 2010 jurisdictions latest years income tax examinations finalized follows united states 2005 nigeria 1994 angola 2001 saudi arabia 2003 company engages ongoing discussions tax authorities regarding resolution tax matters various jurisdictions outcome tax matters timing resolution andor closure tax audits highly uncertain however reasonably possible developments tax matters certain tax jurisdictions may result significant increases decreases company’s total unrecognized tax benefits within next 12 months given number years still remain subject examination number matters examined various tax jurisdictions unable estimate range possible adjustments balance unrecognized tax benefits consolidated statement income company reports interest penalties related liabilities uncertain tax positions “income tax expense” december 31 2010 accruals 225 anticipated interest penalty obligations included consolidated balance sheet compared accruals 232 yearend 2009 income tax expense benefit associated interest penalties 40 20 79 2010 2009 2008 respectively fs48 note 15 taxes continued taxes income note 16 shortterm debt redeemable longterm obligations consist primarily taxexempt variablerate put bonds included current liabilities become redeemable option bondholders within one year following balance sheet date 2010 1250 taxexempt bonds related projects pascagoula el segundo refineries issued company periodically enters interest rate swaps portion shortterm debt december 31 2010 company interest rate swaps shortterm debt december 31 2010 company 6000 committed credit facilities various major banks expiring may 2013 enable refinancing shortterm obligations longterm basis facilities support commercial paper borrowing also used general corporate purposes company’s practice continually replace expiring commitments new commitments substantially terms maintaining levels management believes appropriate borrowings facilities would unsecured indebtedness interest rates based london interbank offered rate average base lending rates published specified banks terms reflecting company’s strong credit rating borrowings outstanding facilities december 31 2010 december 31 2010 2009 company classified 5400 4190 respectively shortterm debt longterm settlement obligations expected require use working capital within one year company intent ability evidenced committed credit facilities refinance longterm basis note 17 longterm debt total longterm debt excluding capital leases december 31 2010 11003 company’s longterm debt outstanding yearend 2010 2009 follows longterm debt 5636 matures follows 2011 33 2012 1520 2013 20 2014 2020 2015 0 2015 2043 2010 30 bonds matured 2009 5000 public bonds issued 400 texaco capital inc bonds matured see note 9 beginning page fs37 information concerning fair value company’s longterm debt fs49 notes consolidated financial statements millions dollars except pershare amounts note 18 new accounting standards transfers servicing asc 860 accounting transfers financial assets asu 200916 fasb issued asu 200916 december 2009 standard became effective company january 1 2010 asu 200916 changes companies account transfers financial assets eliminates concept qualifying specialpurpose entities adoption guidance effect company’s results operations financial position liquidity consolidation asc 810 improvements financial reporting enterprises involved variable interest entities asu 200917 fasb issued asu 200917 december 2009 standard became effective company january 1 2010 asu 200917 requires enterprise qualitatively assess primary beneficiary variableinterest entity vie must consolidated adoption standard impact company’s results operations financial position liquidity receivables asc 310 disclosures credit quality financing receivables allowance credit losses asu 201020 july 2010 fasb issued asu 201020 became effective company’s reporting december 31 2010 standard amends expands disclosure requirements credit quality financing receivables related allowance credit losses result amendments companies required disaggregate portfolio segment class financing receivable certain existing disclosures provide certain new disclosures financing receivables related allowance credit losses adoption standard change company’s existing disclosures note 19 accounting suspended exploratory wells accounting standards costs exploratory wells asc 932 provide exploratory well costs continue capitalized completion drilling well found sufficient quantity reserves justify completion producing well b entity making sufficient progress assessing reserves economic operating viability project either condition met enterprise obtains information raises substantial doubt economic operational viability project exploratory well would assumed impaired costs net salvage value would charged expense note entity required complete exploratory exploratorytype stratigraphic well producing well accounting standards provide number indicators assist entity demonstrating sufficient progress made assessing reserves economic viability project following table indicates changes company’s suspended exploratory well costs three years ended december 31 2010 following table provides aging capitalized well costs number projects exploratory well costs capitalized period greater one year since completion drilling certain projects multiple wells fields 2299 exploratory well costs capitalized one year december 31 2010 982 26 projects related projects drilling activities way firmly planned near future 1317 balance related 27 projects areas requiring major capital expenditure production could begin additional drilling efforts way firmly planned near future additional drilling deemed necessary presence hydrocarbons already established activities process enable future decision project development projects 1317 referenced following activities associated assessing reserves projects’ economic viability 501 three projects project sanction approved construction progress initial recognition proved reserves expected upon reaching “economic producibility” per sec guidelines b 263 six projects development alternatives review c 178 three projects process entering contracts frontend engineering design 154 three projects progression development concept selection unitization agreement e 109 five projects undergoing frontend engineering fs50 note 19 accounting suspended exploratory wells continued design final investment decision expected 2011 f 73 two projects development concept review government 39 miscellaneous activities five projects smaller amounts suspended progress made 53 projects decision recognition proved reserves sec rules cases may occur several years complexity scale negotiations connected projects majority decisions expected occur next three years 2299 suspended well costs capitalized period greater one year december 31 2010 represents 176 exploratory wells 53 projects tables contain aging costs well project basis note 20 stock options sharebased compensation expense stock options 2010 2009 2008 229 149 tax 182 119 tax 168 109 tax respectively addition compensation expense stock appreciation rights restricted stock performance units restricted stock units 194 126 tax 170 110 tax 132 86 tax 2010 2009 2008 respectively significant stockbased compensation cost capitalized december 31 2010 2009 cash received payment option exercises sharebased payment arrangements 2010 2009 2008 385 147 404 respectively actual tax benefits realized tax deductions option exercises 66 25 103 2010 2009 2008 respectively cash paid settle performance units stock appreciation rights 140 89 136 2010 2009 2008 respectively chevron longterm incentive plan ltip awards ltip may take form limited stock options restricted stock restricted stock units stock appreciation rights performance units nonstock grants april 2004 january 2014 160 million shares may issued ltip 64 million shares may form stock option stock appreciation right award requiring full payment shares award recipient major types awards outstanding december 31 2010 contractual terms vary three years performance units 10 years stock options stock appreciation rights texaco stock incentive plan texaco sip closing acquisition texaco october 2001 outstanding options granted texaco sip converted chevron options 10year contractual lives extending 2011 retained provision restored provision enables participant exercises stock option receive new options equal number shares exchanged shares withheld satisfy tax withholding obligations receive new options equal number shares exchanged withheld restored options fully exercisable six months date grant exercise price market value common stock day restored option granted beginning 2007 restored options issued ltip awards may granted former texaco plans unocal sharebased plans unocal plans chevron acquired unocal august 2005 outstanding stock options stock appreciation rights granted various unocal plans exchanged fully vested chevron options appreciation rights awards retained provisions original unocal plans unexercised awards began expiring early 2010 continue expire early 2015 fs51 notes consolidated financial statements millions dollars except pershare amounts note 20 stock options sharebased compensation continued fair market values stock options stock appreciation rights granted 2010 2009 2008 measured date grant using blackscholes optionpricing model following weightedaverage assumptions expected term based historical exercise postvesting cancellation data volatility rate based historical stock prices appropriate period generally equal expected term summary option activity 2010 presented total intrinsic value ie difference exercise price market price options exercised 2010 2009 2008 259 91 433 respectively period company continued practice issuing treasury shares upon exercise awards december 31 2010 242 total unrecognized beforetax compensation cost related nonvested sharebased compensation arrangements granted restored plans cost expected recognized weightedaverage period 17 years january 1 2010 number ltip performance units outstanding equivalent 2679108 shares 2010 1104000 units granted 881759 units vested cash proceeds distributed recipients 173475 units forfeited december 31 2010 units outstanding 2727874 fair value liability recorded instruments 266 addition outstanding stock appreciation rights awards granted various ltip former texaco unocal programs totaled approximately 16 million equivalent shares december 31 2010 liability 40 recorded awards march 2009 chevron granted eligible ltip employees restricted stock units lieu annual cash bonus total 453965 units granted 6970 per unit time grant expense associated special restricted stock units recognized 2009 special restricted stock units distributed november 2010 note 21 employee benefit plans company defined benefit pension plans many employees company typically prefunds defined benefit plans required local regulations certain situations prefunding provides economic advantages united states qualified plans subject employee retirement income security act erisa minimum funding standard company typically fund us nonqualified pension plans subject funding requirements laws regulations contributions pension plans may less economic investment returns may less attractive company’s investment alternatives company also sponsors postretirement opeb plans provide medical dental benefits well life insurance active qualifying retired employees plans unfunded company retirees share costs medical coverage medicareeligible retirees company’s main us medical plan secondary medicare including part increase company contribution retiree medical coverage limited 4 percent year certain life insurance benefits paid company accounting standards postretirement benefits asc 715 company recognizes overfunded underfunded status defined benefit pension opeb plans asset liability consolidated balance sheet funded status company’s pension postretirement benefit plans 2010 2009 following page fs52 note 21 employee benefit plans continued amounts recognized consolidated balance sheet company’s pension postretirement benefit plans december 31 2010 2009 include amounts recognized beforetax basis “accumulated comprehensive loss” company’s pension opeb plans 6749 6454 end 2010 2009 respectively amounts consisted accumulated benefit obligations us international pension plans 9535 4161 respectively december 31 2010 8707 4029 respectively december 31 2009 information us international pension plans accumulated benefit obligation excess plan assets december 31 2010 2009 fs53 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued components net periodic benefit cost amounts recognized comprehensive income 2010 2009 2008 shown table net actuarial losses recorded “accumulated comprehensive loss” december 31 2010 company’s us pension international pension opeb plans amortized straightline basis approximately 10 12 10 years respectively amortization periods represent estimated average remaining service employees expected receive benefits plans losses amortized extent exceed 10 percent higher projected benefit obligation marketrelated value plan assets amount subject amortization determined planbyplan basis 2011 company estimates actuarial losses 314 114 64 amortized “accumulated comprehensive loss” us pension international pension opeb plans respec tively addition company estimates additional 250 recognized “accumulated comprehensive loss” 2011 related lumpsum settlement costs us pension plans weighted average amortization period recognizing prior service costs credits recorded “accumulated comprehensive loss” december 31 2010 approximately seven 11 years us international pension plans respectively 12 years postretirement benefit plans 2011 company estimates prior service credits costs 8 27 72 amortized “accumulated comprehensive loss” us pension international pension opeb plans respectively fs54 note 21 employee benefit plans continued assumptions following weightedaverage assumptions used determine benefit obligations net periodic benefit costs years ended december 31 expected return plan assets company’s estimated longterm rates return pension assets driven primarily actual historical assetclass returns assessment expected future performance advice external actuarial firms incorporation specific assetclass risk factors asset allocations periodically updated using pension plan assetliability studies company’s estimated longterm rates return consistent studies changes expected longterm rate return plan assets since 2002 us plans account 70 percent company’s pension plan assets december 31 2010 estimated longterm rate return us pension plan assets 78 percent marketrelated value assets major us pension plan used determination pension expense based market values three months preceding yearend measurement date opposed maximum allowable period five years us accounting rules management considers threemonth time period long enough minimize effects distortions daytoday market volatility still contemporaneous end year plans market value assets yearend used calculating pension expense discount rate discount rate assumptions used determine us international pension postretirement benefit plan obligations expense reflect prevailing rates available highquality fixedincome debt instruments december 31 2010 company selected 48 percent discount rate us pension plan 50 percent us postretirement benefit plan rate based cash flow analysis matched estimated future benefit payments citigroup pension discount yield curve yearend 2010 discount rates end 2009 53 percent 58 percent us pension plan us opeb plan respectively discount rate end 2008 63 percent us pension plan us opeb plan benefit assumptions measurement accumulated postretirement benefit obligation december 31 2010 main us postretirement medical plan assumed health care costtrend rates start 8 percent 2011 gradually decline 5 percent 2018 beyond measurement december 31 2009 assumed health care costtrend rates started 7 percent 2010 gradually declined 5 percent 2018 beyond measurements annual increase company contributions capped 4 percent assumed health care costtrend rates significant effect amounts reported retiree health care costs impact mitigated 4 percent cap company’s medical contributions primary us plan onepercentagepoint change assumed health care costtrend rates would following effects plan assets investment strategy accounting standards defined benefit pension opeb plans asc 715 provide users financial statements understanding investment allocation decisions made major classes plan assets inputs valuation techniques used measure fair value plan assets effect fair value measurements using unobservable inputs changes plan assets period significant concentrations risk within plan assets fair value hierarchy inputs company uses value pension assets divided three levels fs55 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued level 1 fair values assets measured using unadjusted quoted prices assets prices identical assets active markets plans ability access level 2 fair values assets measured based quoted prices similar assets active markets quoted prices identical similar assets inactive markets inputs quoted prices observable asset inputs derived principally corroborated observable market data correlation means asset contractual term level 2 input observable substantially full term asset fair values level 2 assets generally obtained thirdparty broker quotes independent pricing services exchanges level 3 inputs fair value measurement unobservable assets valuation may performed using financial model estimated inputs entered model fair value measurements company’s pension plans 2010 us equities include investments company’s common stock amount 38 december 31 2010 29 december 31 2009 collective trustsmutual funds us plans entirely index funds international plans mostly index funds index funds level 2 designation partially based restriction advance notification redemptions typically two business days required mixed funds composed funds invest equity fixedincome instruments order diversify lower risk yearend valuations us real estate assets based internal appraisals real estate managers updates thirdparty appraisals occur least year property portfolio “other” asset class includes net payables securities purchased yet settled level 1 dividends interest taxrelated receivables level 2 insurance contracts investments privateequity limited partnerships level 3 certain amounts reclassified conform 2010 presentation fs56 note 21 employee benefit plans continued effects fair value measurements using significant unobservable inputs changes level 3 plan assets period outlined primary investment objectives pension plans achieve highest rate total return within prudent levels risk liquidity diversify mitigate potential downside risk associated investments provide adequate liquidity benefit payments portfolio management company’s us uk pension plans comprise 86 percent total pension assets us uk plans investment committee regularly meets year review asset holdings returns assess plans’ investment performance longterm asset allocation policy benchmarks established primary us pension plan chevron board directors established following approved asset allocation ranges equities 4070 percent fixed income cash 2065 percent real estate 015 percent 05 percent uk pension plan uk board trustees established following asset allocation guidelines reviewed regularly equities 6080 percent fixed income cash 2040 percent significant international pension plans also established maximum minimum asset allocation ranges vary plan actual asset allocation within approved ranges based variety current economic market conditions consideration specific asset class risk significant concentrations risk plan assets due diversification investment classes company prefund opeb obligations cash contributions benefit payments 2010 company contributed 1192 258 us international pension plans respectively 2011 company expects contributions approximately 650 300 us international pension plans respectively actual contribution amounts dependent upon investment returns changes pension obligations regulatory environments economic factors additional funding may ultimately required investment returns insufficient offset increases plan obligations company anticipates paying postretirement benefits approximately 225 2011 compared 183 paid 2010 following benefit payments include estimated future service expected paid company next 10 years fs57 notes consolidated financial statements millions dollars except pershare amounts note 21 employee benefit plans continued employee savings investment plan eligible employees chevron certain subsidiaries participate chevron employee savings investment plan esip charges expense esip represent company’s contributions plan funded either purchase shares common stock open market release common stock held leveraged employee stock ownership plan lesop described section follows total company matching contributions employee accounts within esip 253 257 231 2010 2009 2008 respectively cost reduced value shares released lesop totaling 97 184 40 2010 2009 2008 respectively remaining amounts totaling 156 73 191 2010 2009 2008 respectively represent open market purchases employee stock ownership plan within chevron esip employee stock ownership plan esop 1989 chevron established lesop constituent part esop lesop provides partial prefunding company’s future commitments esip permitted accounting standards sharebased compensation asc 718 debt lesop recorded debt shares pledged collateral reported “deferred compensation benefit plan trust” consolidated balance sheet consolidated statement equity company reports compensation expense equal lesop debt principal repayments less dividends received used lesop debt service interest accrued lesop debt recorded interest expense dividends paid lesop shares reflected reduction retained earnings lesop shares considered outstanding earningspershare computations total credits expense lesop 1 3 1 2010 2009 2008 respectively net credit respective years composed credits compensation expense 6 15 charges interest expense lesop debt 5 12 14 dividends paid lesop shares 46 110 35 used 2010 2009 2008 respectively service lesop debt contributions required 2010 2009 2008 dividends received lesop sufficient satisfy lesop debt service shares held lesop released allocated accounts plan participants based debt service deemed paid year proportion total currentyear remaining debt service lesop shares december 31 2010 2009 follows benefit plan trusts prior acquisition chevron texaco established benefit plan trust funding obligations benefit plans yearend 2010 trust contained 142 million shares chevron treasury stock trust sell shares use dividends shares pay benefits extent company pay benefits company intends continue pay obligations benefit plans trustee vote shares held trust instructed trust’s beneficiaries shares held trust considered outstanding earningspershare purposes distributed sold trust payment benefit obligations prior acquisition chevron unocal established various grantor trusts fund obligations benefit plans including deferred compensation supplemental retirement plans december 31 2010 2009 trust assets 57 invested primarily interestearning accounts employee incentive plans chevron incentive plan annual cash bonus plan eligible employees links awards corporate unit individual performance prior year charges expense cash bonuses 766 561 757 2010 2009 2008 respectively chevron also ltip officers regular salaried employees company subsidiaries hold positions significant responsibility awards ltip consist stock options sharebased compensation described note 20 page fs51 note 22 equity retained earnings december 31 2010 2009 included approximately 9159 8122 respectively company’s share undistributed earnings equity affiliates december 31 2010 81 million shares chevron’s common stock remained available issuance 160 million shares reserved issuance chevron corporation longterm incentive plan ltip fs58 note 22 equity continued addition approximately 280000 shares remain available issuance 800000 shares company’s common stock reserved awards chevron corporation nonemployee directors’ equity compensation deferral plan note 23 restructuring reorganization first quarter 2010 company announced employee reduction programs related restructuring reorganization downstream businesses corporate staffs initial estimate included approximately 3200 employees downstream 600 employees corporate staffs expected terminated programs due redeployment efforts within company total employee terminations programs expected reduced approximately 3800 employees approximately 3200 employees 1500 affected employees located united states 1500 employees terminated date programs expected completed end 2011 beforetax charge 244 175 tax recorded first quarter 2010 191 reported “operating expenses” 53 “selling general administrative expenses” consolidated statement income due reduction terminations resulting reassignments within company adjustment total charges made fourth quarter 2010 effectively reduced total beforetax charge 244 234 167 tax accrued liability classified current consolidated balance sheet approximately 71 45 tax associated terminations us downstream 119 92 tax international downstream 44 30 tax last nine months 2010 company made payments 96 associated liabilities majority payments downstream note 24 contingencies commitments income taxes company calculates income tax expense liabilities quarterly liabilities generally subject audit finalized individual taxing authorities several years end annual period income taxes calculated refer note 15 beginning page fs47 discussion periods tax returns audited company’s major tax jurisdictions discussion tax jurisdictions differences amount tax benefits recognized financial statements amount taken expected taken tax return company expect settlement income tax liabilities associated uncertain tax positions material effect results operations consolidated financial position liquidity guarantees company’s guarantee approximately 600 associated certain payments terminal use agreement entered company affiliate terminal expected operational 2012 approximate 16year term guarantee maximum guarantee amount reduced time certain fees paid affiliate numerous crossindemnity agreements affiliate partners permit recovery amounts paid guarantee chevron recorded liability obligation guarantee indemnifications company provided certain indemnities contingent liabilities equilon motiva shell saudi refining inc connection february 2002 sale company’s interests investments company would required perform indemnified liabilities become actual losses occur company could required make future payments 300 end 2010 company paid 48 indemnities continues obligated possible additional indemnification payments future company also provided indemnities relating contingent environmental liabilities related assets originally contributed texaco equilon motiva joint ventures environmental conditions existed prior formation equilon motiva occurred period texaco’s ownership interest joint ventures general environmental conditions events fs59 notes consolidated financial statements millions dollars except pershare amounts note 24 contingencies commitments continued subject indemnities must arisen prior december 2001 claims asserted february 2009 equilon indemnities must asserted later february 2012 motiva indemnities terms indemnities maximum limit amount potential future payments company posts assets collateral made payments indemnities amounts payable indemnities described preceding paragraph net amounts recovered insurance carriers others net liabilities recorded equilon motiva prior september 30 2001 applicable incident acquisition unocal company assumed certain indemnities relating contingent environmental liabilities associated assets sold 1997 acquirer assets shared certain environmental remediation costs maximum obligation 200 reached december 31 2009 indemnification agreement reaching 200 obligation chevron solely responsible april 2022 indemnification expires environmental conditions events subject indemnities must arisen prior sale assets 1997 although company provided known obligations indemnity probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity longterm unconditional purchase obligations commitments including throughput takeorpay agreements company subsidiaries certain contingent liabilities respect longterm unconditional purchase obligations commitments including throughput takeorpay agreements relate suppliers’ financing arrangements agreements typically provide goods services pipeline storage capacity drilling rigs utilities petroleum products used sold ordinary course company’s business aggregate approximate amounts required payments various commitments 2011 17200 2012 4100 2013 3500 2014 3100 2015 3000 2016 7700 portion commitments may ultimately shared project partners total payments agreements approximately 6500 2010 8100 2009 5100 2008 environmental company subject loss contingencies pursuant laws regulations private claims legal proceedings related environmental matters subject legal settlements future may require company take action correct ameliorate effects environment prior release chemicals petroleum substances including mtbe company parties contingencies may exist various sites including limited federal superfund sites analogous sites state laws refineries crude oil fields service stations terminals land development areas mining operations whether operating closed divested future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties although company provided known environmental obligations probable reasonably estimable amount additional future costs may material results operations period recognized company expect costs material effect consolidated financial position liquidity also company believe obligations make expenditures significant impact company’s competitive position relative us international petroleum chemical companies chevron’s environmental reserve december 31 2010 1507 included balance remediation activities approximately 182 sites company identified potentially responsible party otherwise involved remediation us environmental protection agency epa regulatory agencies provisions federal superfund law analogous state laws company’s remediation reserve sites yearend 2010 185 federal superfund law analogous state laws provide joint several liability responsible parties future actions epa regulatory agencies require chevron assume potentially responsible parties’ costs designated hazardous waste sites fs60 note 24 contingencies commitments continued expected material effect company’s results operations consolidated financial position liquidity remaining yearend 2010 environmental reserves balance 1322 814 related company’s us downstream operations including refineries plants marketing locations ie service stations terminals chemical facilities pipelines remaining 508 associated various sites international downstream 100 upstream 329 businesses 79 liabilities sites whether operating closed divested primarily associated company’s plans activities remediate soil groundwater contamination activities include one following site assessment soil excavation offsite disposal contaminants onsite containment remediation andor extraction petroleum hydrocarbon liquid vapor soil groundwater extraction treatment monitoring natural attenuation contaminants company manages environmental liabilities specific sets regulatory requirements united states include resource conservation recovery act various state local regulations single remediation site yearend 2010 recorded liability material company’s results operations consolidated financial position liquidity likely company continue incur additional liabilities beyond recorded environmental remediation relating past operations future costs fully determinable due factors unknown magnitude possible contamination unknown timing extent corrective actions may required determination company’s liability proportion responsible parties extent costs recoverable third parties refer note 25 discussion company’s asset retirement obligations equity redetermination crude oil natural gas producing operations ownership agreements may provide periodic reassessments equity interests estimated crude oil natural gas reserves activities individually together may result gains losses could material earnings given period one equity redetermination process way since 1996 chevron’s interests four producing zones naval petroleum reserve elk hills california time remaining interests zones owned us department energy wide range remains possible net settlement amount four zones range settlement chevron estimates maximum possible net beforetax liability approximately 200 possible maximum net amount could owed chevron estimated 150 timing settlement exact amount within range estimates uncertain contingencies april 26 2010 california appeals court issued ruling related adequacy environmental impact report eir supporting issuance certain permits city richmond california replace upgrade certain facilities chevron’s refinery richmond settlement discussions plaintiffs case ended late fourth quarter 2010 company continues evaluate options going forward may include requesting city revise eir address issues identified court appeal actions management believes outcomes associated potential options project uncertain due uncertainty company’s future course action potential outcomes action combination actions management believe estimate financial effects ruling made time however company’s ultimate exposure may significant net income one future period chevron receives claims submits claims customers trading partners us federal state local regulatory bodies governments contractors insurers suppliers amounts claims individually aggregate may significant take lengthy periods resolve company affiliates also continue review analyze operations may close abandon sell exchange acquire restructure assets achieve operational strategic benefits improve competitiveness profitability activities individually together may result gains losses future periods fs61 notes consolidated financial statements millions dollars except pershare amounts note 25 asset retirement obligations accordance accounting standards asset retirement obligations asc 410 company records fair value liability asset retirement obligation aro legal obligation associated retirement tangible longlived asset liability reasonably estimated legal obligation perform asset retirement activity unconditional even though uncertainty may exist timing andor method settlement may beyond company’s control uncertainty timing andor method settlement factored measurement liability sufficient information exists reasonably estimate fair value recognition aro includes 1 present value liability offsetting asset 2 subsequent accretion liability depreciation asset 3 periodic review aro liability estimates discount rates accounting standards asset retirement obligations primarily affect company’s accounting crude oil natural gas producing assets significant aros associated legal obligations retire downstream longlived assets recognized indeterminate settlement dates asset retirements prevent estimation fair value associated aro company performs periodic reviews downstream longlived assets changes facts circumstances might require recognition retirement obligation following table indicates changes company’s beforetax asset retirement obligations 2010 2009 2008 table amounts associated “revisions estimated cash flows” reflect increasing costs abandon wells equipment facilities longterm portion 12488 balance end 2010 11788 note 26 financial information earnings 2010 included gains approximately 700 relating sale nonstrategic properties amount approximately 400 300 related downstream upstream assets respectively earnings 2009 included gains approximately 1000 relating sale nonstrategic properties amount approximately 600 400 related downstream upstream assets respectively earnings 2008 included gains approximately 1200 relating sale nonstrategic properties amount approximately 1000 related upstream assets financial information follows excess replacement cost carrying value inventories lastin firstout lifo method used 6975 5491 december 31 2010 2009 respectively replacement cost generally based average acquisition costs year lifo profits charges 21 168 210 included earnings years 2010 2009 2008 respectively company 4617 goodwill consolidated balance sheet related 2005 acquisition unocal accounting standard goodwill asc 350 company tested goodwill impairment 2010 concluded impairment necessary fs62 note 27 earnings per share basic earnings per share eps based upon “net income attributable chevron corporation” “earnings” includes effects deferrals salary compensation awards invested chevron stock units certain officers employees company’s share stock transactions affiliates applicable accounting rules may recorded directly company’s retained earnings instead net income diluted eps includes effects items well dilutive effects outstanding stock options awarded company’s stock option programs refer note 20 “stock options sharebased compensation” beginning page fs51 table sets forth computation basic diluted eps effect dividend equivalents paid stock units dilutive impact employee stockbased awards earnings fs63 page intentionally left blank fs64 fiveyear financial summary unaudited fs65 supplemental information oil gas producing activities unaudited accordance fasb sec disclosure reporting requirements oil gas producing activities section provides supplemental information oil gas exploration producing activities company seven separate tables iv provide historical cost information pertaining costs incurred exploration property acquisitions development capitalized costs results operations tables v vii present information table costs incurred exploration property acquisitions development1 fs66 table ii capitalized costs related oil gas producing activities company’s estimated net provedreserve quantities standardized measure estimated discounted future net cash flows related proved reserves changes estimated discounted future net cash flows africa geographic area includes activities principally angola chad democratic republic congo nigeria republic congo asia geographic area includes activities principally azerbaijan bangladesh china indonesia kazakhstan myanmar partitioned zone kuwait saudi arabia philippines thailand europe geographic area includes activity denmark netherlands norway united kingdom americas geographic region includes activities argentina brazil canada colombia trinidad tobago amounts tco represent chevron’s 50 percent equity share tengizchevroil exploration production partnership republic kazakhstan affiliated companies amounts composed company’s equity interests venezuela angola refer note 12 beginning page fs43 discussion company’s major equity affiliates table ii capitalized costs related oil gas producing activities fs67 table ii capitalized costs related oil gas producing activities continued fs68 table iii results operations oil gas producing activities1 company’s results operations oil gas producing activities years 2010 2009 2008 shown following table net income exploration production activities reported page fs41 reflects income taxes computed effective rate basis income taxes table iii based statutory tax rates reflecting allowable deductions tax credits interest income expense excluded results reported table iii net income amounts page fs41 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations represents accretion aro liability refer note 25 “asset retirement obligations” page fs62 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements geographic presentation conformed 2010 consistent presentation oil gas reserve tables fs69 table iii results operations oil gas producing activities1 continued value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations geographic presentation conformed 2010 consistent presentation oil gas reserve tables represents accretion aro liability refer note 25 “asset retirement obligations” page fs62 includes foreign currency gains losses gains losses property dispositions income operating technical service agreements excludes results producing operations oil sands americas heavy oil affiliated since 2008 precedes update extractive industries oil gas topic 932 fs70 table iv results operations oil gas producing activities unit prices costs1 value owned production consumed operations fuel eliminated revenues production expenses related volumes deducted net production calculating unit average sales price production cost effect results producing operations natural gas converted oilequivalent gas oeg barrels rate 6 mcf 1 oeg barrel geographic presentation conformed 2010 consistent presentation oil gas reserve tables excludes oil sands americas heavy oil affiliated since 2008 precedes update extractive industries oil gas topic 932 table v reserve quantity information reserves governance company adopted comprehensive reserves resource classification system modeled system developed approved society petroleum engineers world petroleum congress american association petroleum geologists system classifies recoverable hydrocarbons six categories based status time reporting three deemed commercial three noncommercial within commercial classification proved reserves two categories unproved probable possible noncommercial categories also referred contingent resources reserves estimates classified proved must meet sec company standards proved oil gas reserves estimated quantities geoscience engineering data demonstrate reasonable certainty economically producible future known reservoirs existing economic conditions operating methods government regulations net proved reserves exclude royalties interests owned others reflect contractual arrangements royalty obligations effect time estimate proved reserves classified either developed undeveloped proved developed reserves quantities expected recovered existing wells existing equipment operating methods due inherent uncertainties limited nature reservoir data estimates reserves subject change additional information becomes available proved reserves estimated company asset teams composed earth scientists engineers part internal control process related reserves estimation com pany maintains reserves advisory committee rac chaired corporate reserves manager member corporate department reports directly vice chairman responsible company’s worldwide exploration production activities corporate reserves manager acts chairman rac 30 years experience working oil gas industry master science petroleum engineering degree stanford university experience includes 15 years managing oil gas reserves processes acting chairman society petroleum engineers oil gas reserves committee currently serves united nations expert group resources classification active member society petroleum evaluation engineers also past member joint committee reserves evaluator training california conservation committee rac members degreed professionals 15 years experience various aspects reserves estimation relating reservoir engineering petroleum engineering earth science accounting policy financial reporting members knowledgeable sec guidelines proved reserves classification receive annual training preparation reserves estimates rac manages activities two operating companylevel reserves managers two reserves managers members rac preserve corporatelevel independence rac following primary responsibilities establish policies processes used within operating units estimate reserves provide independent reviews oversight business units’ recommended reserves estimates changes confirm proved reserves recognized accordance sec guidelines determine fs71 table v reserve quantity information continued summary net oil gas reserves reserve volumes calculated using consistent appropriate standards procedures technology maintain corporate reserves manual provides standardized procedures used corporatewide classifying reporting hydrocarbon reserves year rac represented meetings company’s upstream business units review discuss reserve changes recommended various asset teams major changes also reviewed company’s strategy planning committee whose members include chief executive officer chief financial officer company’s annual reserve activity also reviewed board directors major changes reserves occur annual reviews matters would also discussed board rac subteams also conduct indepth reviews year many fields largest proved reserves quantities reviews include examination provedreserve records documentation compliance corporate reserves manual revised oil gas reporting december 2008 sec issued final rule modernization oil gas reporting disclosure requirements final rule became effective company form 10k filing year ending december 31 2009 final rule changed number oil gas reserve estimation disclosure requirements sec regulations sk sx subsequently fasb updated extractive industries oil gas topic 932 align oil gas reserves estimation disclosure requirements sec’s final rule new disclosure requirements applied data reported 2009 2010 proved undeveloped reserve quantities end 2010 proved undeveloped reserves consolidated companies totaled 26 billion barrels oilequivalent boe approximately 63 percent reserves attributed natural gas half located australia crude oil condensate natural gas liquids ngls accounted 32 percent total largest concentration reserves africa asia united states synthetic oil accounted balance proved undeveloped reserves located canada americas region fs72 table v reserve quantity information continued proved undeveloped reserves equity affiliates amounted 13 billion boe yearend crude oil condensate ngls represented 59 percent reserves tco accounting majority amount natural gas represented 25 percent total approximately 45 percent reserves tco balance attributed synthetic oil venezuela region 2010 total 447 million boe transferred proved undeveloped proved developed consolidated companies americas 171 million boe transferred primarily due startup synthetic crude expansion project canada africa region 135 million boe transferred proved developed result development drilling nigeria angola startup natural gas processing plant nigeria transfers asia united states accounted remainder proved undeveloped reserves affiliated companies declined slightly 13 million boe transferred proved developed material downward revisions proved undeveloped reserves consolidated affiliated companies investment convert proved undeveloped proved developed reserves 2010 investments totaling approximately 83 billion made consolidated companies equity affiliates advance development proved undeveloped reserves australia 26 billion expended primarily driven construction activities gorgon lng project africa region 21 billion expended various projects including offshore development projects nigeria angola nigeria construction progressed deepwater project development activities continued natural gas processing plant angola offshore development drilling progressed along several gas injection projects united states expenditures totaled 11 billion three offshore development projects gulf mexico various smaller development projects asia region expenditures year totaled 09 billion included construction gas processing facility thailand gas development project china completion steamflood project indonesia americas development expenditures totaled 08 billion variety projects including synthetic crude project canada europe 01 billion expended various development projects affiliated companies expended 07 billion primarily lng project angola proved undeveloped reserves five years reserves remain classified proved undeveloped five years result several physical factors affect optimal project development execution complex nature development project adverse remote locations physical limitations infrastructure plant capacities dictate project timing compression projects pending reservoir pressure declines contractual limitations dictate production levels yearend 2010 company held approximately 17 billion boe proved undeveloped reserves remained undeveloped five years reserves held consolidated affiliated companies majority reserves locations company proven track record developing major projects africa approximately 330 million boe related deepwater natural gas developments nigeria angola major nigerian deepwater development projects include agbami started production 2008 ongoing development activities maintain full utilization infrastructure capacity usan development construction expected enter production 2012 also nigeria various fields infrastructure associated escravos gas projects currently development angola tombualandana deepwater project became operational 2009 ongoing development drilling expected bring field maximum production 2011 asia approximately 230 million boe related continued development pattani field gulf thailand contractual constraints malampaya field philippines timing compression installation aligns natural field declines andor meet contractual requirements ongoing development scheduled maintain production within infrastructure constraints australia approximately 130 million boe remain undeveloped five years due future compression projects north west shelf venture scheduled 2013 united states approximately 70 million boe remain proved undeveloped primarily related steamflood expansion affiliated companies hold approximately 940 million boe proved undeveloped reserves held five years tco affiliate kazakhstan accounts approximately 800 million boe field production constrained plant capacity limitations field development convert remaining proved undeveloped reserves scheduled occur line reservoir depletion venezuela affiliate operates hamaca field’s synthetic heavy oil upgrading operation accounts 140 million boe proved undeveloped reserves held five years development drilling continues hamaca optimize utilization upgrader capacity annually company assesses whether changes occurred facts circumstances changes development plans regulations government policies would warrant revision reserve estimates 2010 assessment result material changes reserves classified proved undeveloped past three years ratio proved undeveloped reserves total proved fs73 table v reserve quantity information continued reserves ranged 35 percent 39 percent consistent completion major capital projects kept ratio narrow range time period proved reserve quantities december 31 2010 proved reserves company’s consolidated operations 77 billion boe refer term “reserves” page e26 definition oilequivalent reserves approximately 22 percent total reserves located united states company’s interests equity affiliates proved reserves 28 billion boe 79 percent associated company’s 50 percent ownership tco aside tengiz field tco affiliate single property accounted 5 percent company’s total oilequivalent proved reserves 25 individual properties company’s portfolio assets contained 1 percent 5 percent company’s oilequivalent proved reserves aggregate accounted 49 percent company’s total oilequivalent proved reserves properties geographically dispersed located united states canada south america west africa asia australia united states total proved reserves yearend 2010 17 billion boe california properties accounted 43 percent us reserves classified heavy oil heavy oil’s high viscosity need employ enhanced recovery methods producing operations capital intensive nature company’s heavyoil fields california employ continuous steamflooding process gulf mexico region contains 21 percent us reserves liquids representing 15 percent reserves production operations mostly offshore result also capital intensive us areas represent remaining 36 percent us reserves evenly split liquids natural gas production crude oil fields utilize enhanced recovery methods including waterflood co2 injection three years ending december 31 2010 pattern net reserve changes shown following tables necessarily indicative future trends apart acquisitions company’s ability add proved reserves affected among things events circumstances outside company’s control delays government permitting partner approvals development plans declines oil gas prices opec constraints geopolitical uncertainties civil unrest company’s estimated net proved reserves crude oil condensate natural gas liquids synthetic oil changes thereto years 2008 2009 2010 shown table following page company’s estimated net proved reserves natural gas shown page fs77 fs74 table v reserve quantity information continued net proved reserves crude oil condensate natural gas liquids synthetic oil noteworthy amounts categories liquids proved reserve changes 2008 2010 discussed revisions 2008 net revisions increased reserves 536 million barrels worldwide consolidated companies increased reserves 267 million barrels equity affiliates consolidated companies largest increase asia region added 574 million barrels majority increase partitioned zone result concession extension indonesia reserves increased due mainly impact lower yearend prices reserve calculations productionsharing contracts well result development drilling improved waterflood steamflood performance upward revisions also recorded kazakhstan azerbaijan mainly associated effect lower yearend prices calculation reserves associated productionsharing variableroyalty contracts increases offset downward revisions europe united states affiliated companies 249 millionbarrel increase tco due effect lower yearend prices royalty determination effect facility optimization tengiz korolev fields 2009 net revisions increased reserves 355 million barrels worldwide consolidated companies decreased reserves 187 million barrels equity affiliates consolidated companies largest increase 460 million barrels americas region due inclusion synthetic oil related canadian oil sands united states reserves increased 63 million barrels result development drilling performance revisions increases partially offset decreases 121 million barrels asia 46 million barrels africa asia decreases indonesia azerbaijan driven effect higher 12month average prices calculation reserves associated productionsharing contracts effect reservoir performance revisions africa reserves nigeria declined result higher prices productionsharing contracts well reservoir performance affiliated companies tco declined 184 million barrels primarily due effect higher 12month average fs75 table v reserve quantity information continued prices royalty determination affiliated companies 266 million barrels heavy crude oil reclassified synthetic oil activities venezuela 2010 net revisions increased reserves 103 million barrels consolidated companies decreased reserves 21 million barrels affiliated companies consolidated companies improved reservoir performance recovery factors accounted majority 63 million barrel increase united states increases regions partially offset asia region decreased result effect higher prices productionsharing contracts kazakhstan affiliated companies price effect royalty determination tco decreased reserves 33 million barrels partially offset improved reservoir performance development drilling venezuela improved recovery 2008 improved recovery increased worldwide liquids volumes 37 million barrels consolidated companies largest addition asia region related gas reinjection kazakhstan affiliated companies increased reserves 10 million barrels due improved secondary recovery boscan 2009 improved recovery increased liquids volumes 86 million barrels worldwide consolidated companies accounted 50 million barrels largest addition related improved secondary recovery nigeria affiliated companies increased reserves 36 million barrels due improvements related tco sour gas injectionsecond generation plant sgisgp facilities 2010 improved recovery increased volumes 77 million barrels worldwide consolidated companies reserves africa increased 58 million barrels due primarily secondary recovery performance nigeria reserves united states increased 11 million primarily california affiliated companies increased reserves 3 million barrels extensions discoveries 2008 extensions discoveries increased consolidated company reserves 33 million barrels worldwide united states increased reserves 17 million barrels primarily gulf mexico africa asia americas regions increased reserves 16 million barrels one country resulting additions greater 5 million barrels 2009 extensions discoveries increased liquids volumes 52 million barrels worldwide largest additions 20 million barrels australia region related gorgon project 13 million barrels americas region related delineation drilling argentina africa united states accounted 10 million barrels 6 million barrels respectively 2010 extensions discoveries increased consolidated companies reserves 63 million barrels worldwide united states americas increased reserves 19 million barrels asia increased reserves 16 million barrels single area united states individually significant drilling activity argentina brazil accounted majority increase americas asia increase primarily related activity azerbaijan fs76 table v reserve quantity information continued net proved reserves natural gas noteworthy amounts categories natural gas provedreserve changes 2008 2010 discussed revisions 2008 net revisions increased reserves consolidated companies 1166 bcf increased reserves affiliated companies 1130 bcf asia region positive revisions totaled 1073 bcf consolidated companies almost half increase attributed karachaganak field kazakhstan due mainly effects low yearend prices productionsharing contract results development drilling improved recovery large upward revisions recorded pattani field thailand due successful drilling campaign americas region improved field performance new contracts colombia trinidad tobago respectively accounted 154 bcf increase tco affiliate kazakhstan increase 498 bcf reflected impacts lower yearend prices royalty determination facility optimization reserves associated angola lng project accounted majority 632 bcf increase affiliated companies 2009 net revisions increased reserves 569 bcf consolidated companies decreased reserves 44 bcf affiliated companies consolidated companies net increases 493 bcf asia primarily result reservoir studies bangladesh development drilling thailand results partially offset downward revision due impact higher prices productionsharing contracts myanmar australia region 166 bcf increase reserves resulted improved reservoir performance compression americas region reserves decreased 126 bcf driven primarily effect higher prices productionsharing contracts trinidad tobago united states net increase 39 bcf result development drilling gulf mexico partially offset performance revisions california midcontinent areas equity affiliates downward revision 237 bcf tco due effect higher prices royalty determination increase gas injection sgisgp facilities decline partially offset performance drilling opportunities related angola lng project fs77 table v reserve quantity information continued 2010 net revisions increased reserves 197 bcf consolidated companies offset 268 bcf decrease net revisions affiliated companies consolidated companies net increase united states 220 bcf primarily midcontinent area gulf mexico result number small upward revisions related improved reservoir performance drilling activity none individually significant increase partially offset downward revisions due impact higher prices productionsharing contracts asia region equity affiliates downward revision 324 bcf tco due price effect royalty determination change variableroyalty calculation decline partially offset recognition additional reserves related angola lng project extensions discoveries 2009 worldwide extensions discoveries 4387 bcf attributed consolidated companies australia gorgon project accounted 4276 bcf additions asia development drilling thailand accounted majority increase united states delineation drilling california accounted majority increase sales 2009 worldwide sales 117 bcf related consolidated companies americas region sale properties argentina accounted 84 bcf sale properties gulf mexico accounted majority 33 bcf decrease united states fs78 table vi standardized measure discounted future net cash flows related proved oil gas reserves standardized measure discounted future net cash flows related preceding proved oil gas reserves calculated accordance requirements fasb estimated future cash inflows production computed applying 12month average prices oil gas yearend quantities estimated net proved reserves future price changes limited provided contractual arrangements existence end reporting year future development production costs estimated future expenditures necessary develop produce yearend estimated proved reserves based yearend cost indices assuming continuation yearend economic conditions include estimated costs asset retirement obligations estimated future income taxes calculated applying appropriate yearend statutory tax rates reflect allowable deductions tax credits applied estimated future pretax net cash flows less tax basis related assets discounted future net cash flows calculated using 10 percent midperiod discount factors discounting requires yearbyyear estimate future expenditures incurred reserves produced information provided represent management’s estimate company’s expected future cash flows value proved oil gas reserves estimates provedreserve quantities imprecise change time new information becomes available moreover probable possible reserves may become proved future excluded calculations valuation prescribed fasb requires assumptions timing amount future development production costs calculations made december 31 year relied upon indication company’s future cash flows value oil gas reserves following table “standardized measure net cash flows” refers standardized measure discounted future net cash flows fs79 table vii changes standardized measure discounted future net cash flows proved reserves changes present values years significant reflect changes estimated provedreserve quantities prices assumptions used forecasting production volumes costs changes timing production included “revisions previous quantity estimates” fs80 exhibit index e1 attached exhibit 101 report documents formatted xbrl extensible business reporting language users data advised pursuant rule 406t regulation st interactive data file deemed filed part registration statement prospectus purposes section 11 12 securities act 1933 deemed filed purposes section 18 securities exchange act 1934 otherwise subject liability sections financial information contained xbrlrelated documents “unaudited” “unreviewed” filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 e2item 15 exhibits financial statement schedules athe following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts three years period ended december 31 2020 3 exhibits exhibit index following pages lists exhibits filed part report schedule ii valuation qualifying accounts 1 see also note 15 consolidated financial statements beginning page 79 2 includes 974 additions associated purchase noble item 16 form 10k summary applicable exhibit index attached exhibit 101 report documents formatted ixbrl inline extensible business reporting language financial information contained ixbrlrelated documents “unaudited” “unreviewed” indicates management contract compensatory plan arrangement filed herewith furnished herewith pursuant item 601b4 regulation sk certain instruments respect company’s longterm debt filed annual report form 10k copy instrument furnished securities exchange commission upon request signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 25th day february 2021 chevron corporation bys michael k wirth michael k wirth chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 25th day february 2021 principal executive officer director michael k wirth michael k wirth chairman board chief executive officer principal financial officer pierre r breber pierre r breber vice president chief financial officer principal accounting officer david inchausti david inchausti vice president controller mary francis mary francis attorneyinfact directors wanda austin wanda austin john b frank john b frank alice p gast alice p gast enrique hernandez jr enrique hernandez jr marillyn hewson marillyn hewson jon huntsman jr jon huntsman jr charles w moorman iv charles w moorman iv dambisa f moyo dambisa f moyo debra reedklages debra reedklages ronald sugar ronald sugar james umpleby iii james umpleby iiinannanitem 15 exhibits financial statement schedules following documents filed part report 1 financial statements 2 financial statement schedules included schedule ii valuation qualifying accounts 3 exhibits exhibit index following pages lists exhibits filed part report schedule ii valuation qualifying accounts see also note 18 consolidated financial statements beginning page 75 item 16 form 10k summary applicable exhibit index attached exhibit 101 report documents formatted xbrl extensible business reporting language financial information contained xbrlrelated documents “unaudited” “unreviewed” indicates management contract compensatory plan arrangement filed herewith copies exhibits contained herein available security holder upon written request corporate governance department chevron corporation 6001 bollinger canyon road san ramon california 945832324 signatures pursuant requirements section 13 15d securities exchange act 1934 registrant duly caused report signed behalf undersigned thereunto duly authorized 22nd day february 2018 chevron corporation michael k wirth michael k wirth chairman board chief executive officer pursuant requirements securities exchange act 1934 report signed following persons behalf registrant capacities indicated 22nd day february 2018 principal executive officer director michael k wirth michael k wirth chairman board chief executive officer principal financial officer patricia e yarrington patricia e yarrington vice president chief financial officer principal accounting officer jeanette l ourada jeanette l ourada vice president comptroller mary francis mary francis attorneyinfact directors wanda austin wanda austin linnet f deily linnet f deily robert e denham robert e denham john b frank john b frank alice p gast alice p gast enrique hernandez jr enrique hernandez jr charles w moorman iv charles w moorman iv dambisa f moyo dambisa f moyo ronald sugar ronald sugar inge g thulin inge g thulin