to jointly pursue other downstream and upstream business opportunities. If discussions pursuant to the memoranda of understanding lead to definitive agreements, Chevron may increase its equity stake in Reliance Petroleum to 29 percent.

Other

Biofuels   In May 2006, the company announced that it had completed the acquisition of a 22 percent interest in Galveston Bay Biodiesel L.P., which is building one of the first large-scale biodiesel plants in the United States. The following month, the company entered into a research alliance with the Georgia Institute of Technology to pursue advanced technology aimed at making cellulosic biofuels and hydrogen into transportation fuels. In September, the company announced a research collaboration with the University of California, Davis aimed at converting cellulosic biomass into transportation fuels.

     Common Stock Dividends and Stock Repurchase Program   In April 2006, the company increased its quarterly common stock dividend by 15.5 percent to $0.52 per share. In November, the company completed its second $5 billion common stock buyback program since 2004 and in December authorized the acquisition of up to $5 billion of additional shares over a period of up to three years.

RESULTS OF OPERATIONS

Major Operating Areas   The following section presents the results of operations for the company’s business segments – upstream, downstream and chemicals – as well as for “all other,” which includes mining, power generation businesses, and the various companies and departments that are managed at the corporate level. Income is also presented for the U.S. and international geographic areas of the upstream and downstream business segments. (Refer to Note 8, beginning on page FS-38, for a discussion of the company’s “reportable segments,” as defined in FASB No. 131, Disclosures About Segments of an Enterprise and Related Information.) This section should also be read in conjunction with the discussion in “Business Environment and Outlook” on pages FS-2 through FS-5. 

U.S. Upstream – Exploration and Production

     U.S. upstream income of $4.3 billion in 2006 increased approximately $100 million from 2005. Earnings in 2006 benefited about $850 million from higher average prices on oil-equivalent production and the effect of seven additional months of production from the Unocal properties that were acquired in August 2005. Substantially offsetting these benefits were increases in operating expense and expenses for depreciation and exploration. Included in the operating expense increases were costs associated with the carryover effects of hurricanes in the Gulf of Mexico in 2005.

     Income of $4.2 billion in 2005 was $230 million higher than 2004. The 2004 amount included gains of approximately $400 million from asset sales. Higher prices for crude oil and natural gas in 2005 and five months of earnings from the former Unocal operations contributed approximately $2 billion to the increase between periods. Approximately 90 percent of this amount related to the effects of higher prices on heritage-Chevron production. These benefits were substantially offset by the adverse effects of lower production,