from increased liftings. Non-recurring income tax items also benefited earnings between periods. These benefits to income were partially offset by the impact of higher operating and depreciation expenses.

     Income in 2006 of approximately $8.9 billion increased $1.3 billion from 2005. Earnings in 2006 benefited approximately $3 billion from higher prices for crude oil and natural gas and an additional seven months of production from the former Unocal properties. About 70 percent of this benefit was associated with the impact of higher prices. Substantially offsetting these benefits were increases in depreciation expense, operating expense and exploration expense. Also adversely affecting 2006 income were higher taxes related to an increase in tax rates in the U.K. and Venezuela and settlement of tax claims and other tax items in Venezuela, Angola and Chad. Foreign currency effects reduced earnings by $371 million in 2006, but increased income $14 million in 2005.

     The company’s average realization for crude oil and natural gas liquids in 2007 was $65.01 per barrel, compared with $57.65 in 2006 and $47.59 in 2005. The average natural gas realization was $3.90 per thousand cubic feet in 2007, compared with $3.73 and $3.19 in 2006 and 2005, respectively.

     Net oil-equivalent production of 1.88 million barrels per day in 2007 declined about 2 percent from 2006 and increased 5 percent from 2005. The volumes for each year included production from oil sands in Canada and an operating service agreement in Venezuela until its conversion to a joint-stock company in October 2006. The decline between 2006 and 2007 was associated with the impact of this contract conversion in Venezuela and the price effects on production volumes calculated under production-sharing agreements. Partially offsetting the decline was increased production in Bangladesh, Angola and Azerbaijan. The increase from 2005 was due to that year having included only five months of production from the former Unocal properties.

     The net liquids component of oil-equivalent production was 1.3 million barrels per day in 2007, a decrease of approximately 4 percent from 2006 and 3 percent from 2005. Net natural gas production of 3.3 billion cubic feet per day in 2007 was up 5.5 percent and 28 percent from 2006 and 2005, respectively.

     Refer to the “Selected Operating Data” table, on page FS-10, for the three-year comparative of international production volumes.

US. Downstream - Refining, Marketing and Transportation

     U.S. downstream earnings of $966 million in 2007 declined nearly $1 billion from 2006 and were essentially the same as 2005. The decline in 2007 from 2006 was associated mainly with weaker refined-product margins due to the effects of higher crude oil prices and the negative impacts of higher planned and unplanned downtime on refinery production volumes at the company’s three major refineries. Operating expenses were also higher in 2007. The improvement in 2006 earnings from 2005 was primarily associated with higher average refined-product margins in 2006 and the adverse effect of downtime in 2005 at refining, marketing and pipeline operations that was