over operational control of all Orinoco Heavy Oil Associations effective May 1, 2007, and to increase its ownership in all such Associations to a minimum of 60 percent. The decree included Chevron’s 30 percent-owned Hamaca project. In April 2007, Chevron signed a memorandum of understanding (MOU) with PDVSA that summarized the ongoing discussions to transfer control of Hamaca operations in accordance with the February decree. As provided in the MOU, a PDVSA-controlled transitory operational committee, on which Chevron had representation, assumed responsibility for daily operations on May 1, 2007. The MOU stipulated that terms of existing contracts were to remain in place during the transition period. In December 2007, Chevron executed a conversion agreement and signed a charter and by-laws with a PDVSA subsidiary that provided for Chevron to retain its 30 percent interest in the Hamaca project. The new entity, Petropiar, commenced activities in January 2008. The conversion agreement did not have a material effect on Chevron’s results of operations, consolidated financial position or liquidity.

     Refer to pages FS-6 through FS-7 for additional discussion of the company’s upstream operations.

     Downstream  Earnings for the downstream segment are closely tied to margins on the refining and marketing of products that include gasoline, diesel, jet fuel, lubricants, fuel oil and feedstocks for chemical manufacturing. Industry margins are sometimes volatile and can be affected by the global and regional supply-and-demand balance for refined products and by changes in the price of crude oil used for refinery feedstock. Industry margins can also be influenced by refined-product inventory levels, geopolitical events, refinery maintenance programs and disruptions at refineries resulting from unplanned outages that may be due to severe weather, fires or other operational events.

     Other factors affecting profitability for downstream operations include the reliability and efficiency of the company’s refining and marketing network, the effectiveness of the crude-oil and product-supply functions and the economic returns on invested capital. Profitability can also be affected by the volatility of tanker charter rates for the company’s shipping operations, which are driven by the industry’s demand for crude oil and product tankers. Other factors beyond the company’s control include the general level of inflation and energy costs to operate the company’s refinery and distribution network.

     The company’s most significant marketing areas are the West Coast of North America, the U.S. Gulf Coast, Latin America, Asia, sub-Saharan Africa and the United Kingdom. Chevron operates or has ownership interests in refineries in each of these areas except Latin America. For the industry, refined-product margins were generally higher in 2007 than in 2006. For the company, U.S. refined-product margins during 2007 were negatively affected by planned and unplanned downtime at its three largest U.S. refineries.

     Industry margins in the future may be volatile and are influenced by changes in the price of crude oil used for refinery feedstock and by changes