portions of all the affected fields, and more than 20,000 barrels per day of production had been restored. In early 2007, additional production restoration activities continued in the area; however, intermittent civil unrest could adversely impact company operations in the future.

     Downstream   Earnings for the downstream segment are closely tied to global and regional supply and demand for refined products and the associated effects on industry refining and marketing margins. Other factors 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 charter expenses for the company’s shipping operations, which are driven by the industry’s demand for crude oil and product tankers. Other factors that are 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 core marketing areas are the West Coast of North America, the U.S. Gulf Coast, Latin America, Asia and sub-Saharan Africa. The company operates or has ownership interests in refineries in each of these areas, except Latin America. In 2006, earnings for the segment improved substantially, mainly as the result of higher average margins for refined products and improved operations at the company’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 in the supply and demand for crude oil and refined products. The industry supply and demand balance can be affected by disruptions at refineries resulting from maintenance programs and unplanned outages, including weather-related disruptions; refined-product inventory levels; and geopolitical events.

     Chemicals   Earnings in the petrochemicals business are closely tied to global chemical demand, industry inventory levels and plant capacity utilization. Feedstock and fuel costs, which tend to follow crude oil and natural gas price movements, also influence earnings in this segment.

OPERATING DEVELOPMENTS

Key operating developments and other events during 2006 and early 2007 included:

Upstream

United States   In the Gulf of Mexico, the company announced in September 2006 the completion of a successful production test on the 50 percent-owned and operated Jack #2 well. The test was a follow-up to the 2004 Jack discovery and was the deepest well-test ever accomplished in the Gulf of Mexico.

     Also in the Gulf of Mexico, the company announced in October its decision to develop the Great White, Tobago and Silvertip fields via a common producing hub, the Perdido Regional Host, which will have a processing capacity of 130,000 barrels of oil-equivalent per day. First production from the 38 percent-owned Perdido Regional Host is anticipated by 2010. The company’s ownership interests in the fields are Great White – 33 percent, Tobago – 58 percent and Silvertip – 60 percent.

     Angola   In June 2006, the company produced the first crude