of operations for both segments is movement in the price of crude oil. In the downstream business, crude oil is the largest cost component of refined products. Overall earnings trends are typically less affected by results from the company’s chemical business and other activities and investments. Earnings for the company in any period may also be affected by events or transactions that are infrequent and/or unusual in nature.

     The company’s long-term competitive position, particularly given the capital-intensive and commodity-based nature of the industry, is closely associated with the company’s ability to invest in projects that provide adequate financial returns and to manage operating expenses effectively. Creating and maintaining an inventory of projects depends on many factors, including obtaining rights to explore for crude oil and natural gas, developing and producing hydrocarbons in promising areas, drilling successfully, bringing long-lead time capital-intensive projects to completion on budget and on schedule, and operating mature upstream properties efficiently and profitably.

     The company also continuously evaluates opportunities to dispose of assets that are not key to providing long-term value, or to acquire assets or operations complementary to its asset base to help augment the company’s growth. Asset-disposition and restructuring may occur in future periods and could result in significant gains or losses.

     In August 2005, the company acquired Unocal Corporation (Unocal), an independent oil and gas exploration and production company. The aggregate purchase price was $17.3 billion, which included $7.5 billion cash, approximately 169 million shares of Chevron common stock valued at $9.6 billion, and $0.2 billion for stock options on approximately 5 million shares and merger-related fees. Refer to Note 2, beginning on page FS-36, for a discussion of the Unocal acquisition.

     Comments related to earnings trends for the company’s major business areas are as follows:

     Upstream   Earnings for the upstream segment are closely aligned with industry price levels for crude oil and natural gas. Crude oil and natural gas prices are subject to external factors over which the company has no control, including product demand connected with global economic conditions, industry inventory levels, production quotas imposed by the Organization of Petroleum Exporting Countries (OPEC), weather-related damage and disruptions, competing fuel prices, and regional supply interruptions that may be caused by military conflicts, civil unrest or political uncertainty.

Moreover, any of these factors could also inhibit the company’s production capacity in an affected region. The company monitors developments closely in the countries in which it operates and holds investments, and attempts to manage risks in operating its facilities and business.

     Price levels for capitalized costs and operating expenses associated with the efficient production of crude oil and natural gas can also be subject to external factors beyond the company’s control. External factors include not only the general level of inflation but also prices charged