States.

International Upstream

     International upstream earnings of $18.3 billion in 2011 increased $4.7 billion from 2010. Higher prices for crude oil increased earnings by $7.1 billion. This benefit was partly offset by higher tax items of about $1.7 billion and higher operating expenses, including fuel, of about $1.0 billion. Foreign currency effects increased earnings by $211 million in 2011, compared with a decrease of $293 million a year earlier.

     Earnings of $13.6 billion in 2010 increased $4.9 billion from 2009. Higher prices for crude oil and natural gas increased earnings by $4.3 billion, and an increase in net oil-equivalent production in the 2010 period benefited income by about $1.2 billion. This net benefit was partly offset by higher operating expenses of $500 million. A favorable change in tax items of about $450 million was mostly offset by higher depreciation expenses. The 2009 period included gains of about $500 million on asset sales and tax items related to the Gorgon Project in Australia. Foreign currency effects decreased earnings by $293 million in the 2010 period, compared with a reduction of $578 million a year earlier, primarily reflecting noncash losses on balance sheet remeasurement.

     The company’s average realization for international crude oil and natural gas liquids in 2011 was $101.53 per barrel, compared with $72.68 in 2010 and $55.97 in 2009. The average natural gas realization was $5.39 per thousand cubic feet in 2011, compared with $4.64 and $4.01 in 2010 and 2009, respectively.

     International net oil-equivalent production of 2.0 million barrels per day in 2011 decreased about 3 percent from 2010 and remained relatively flat with 2009. The volumes in 2011 and 2010 include synthetic oil that was reported in 2009 as production from oil sands in Canada. Absent price effects on entitlement volumes, net oil-equivalent production decreased 1 percent in 2011 and increased 5 percent in 2010, when compared with the prior year’s production.

     The net liquids component of international oil-equivalent production was about 1.4 million barrels per day in 2011, a decrease of approximately 3 percent from 2010 and an increase of approximately 2 percent from 2009. International net natural gas production of 3.7 billion cubic feet per day in 2011 was down 2 percent from 2010 and up 2 percent from 2009.

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

U.S. Downstream

     U.S. downstream operations earned $1.5 billion in 2011, compared with $1.3 billion in 2010. Earnings benefited by $300 million from improved margins on refined products, $200 million from higher earnings from the 50 percent-owned Chevron Phillips Chemical Company LLC (CPChem), and $50 million from the absence of 2010 charges related to employee reductions. These benefits were partly offset by the absence of a $400 million gain on the sale of the company’s ownership interest in the Colonial Pipeline Company recognized in 2010.

     Earnings increased $1.5 billion in 2010 from 2009. Improved margins on refined products increased earnings by about