the United States).

     Besides the impact of the fluctuation in price for crude oil and natural gas, the longer-term trend in earnings for the upstream segment is also a function of other factors, including the company’s ability to find or acquire and efficiently produce crude oil and natural gas, changes in fiscal terms of contracts, changes in tax rates on income, and the cost of goods and services.

     Chevron’s worldwide net oil-equivalent production in 2007, including volumes produced from oil sands, averaged 2.62 million barrels per day, a decline of about 48,000 barrels per day from 2006, due mainly to the effect of a conversion of operating service agreements in Venezuela to joint-stock companies. (Refer to the table “Selected Operating Data” on page FS-l0 for a listing of production volumes for each of the three years ending December 31, 2007.) The company estimates that oil-equivalent production in 2008 will average approximately 2.65 million barrels per day. This estimate is subject to many uncertainties, including quotas that may be imposed by OPEC, the price effect on production volumes calculated under cost-recovery and variable-royalty provisions of certain contracts, changes in fiscal terms or restrictions on the scope of company operations, delays in project start-ups, weather conditions that may shut in production, civil unrest, changing geopolitics or other disruptions to operations. Future production levels also are affected by the size and number of economic investment opportunities and, for new large-scale projects, the time lag between initial exploration and the beginning of production. Most of Chevron’s upstream investment is currently being made outside the United States. Investments in upstream projects generally are made well in advance of the start of the associated crude oil and natural gas production.

     Approximately 28 percent of the company’s net oil-equivalent production in 2007 occurred in the OPEC-member countries of Angola, Indonesia, Nigeria and Venezuela and in the Partitioned Neutral Zone between Saudi Arabia and Kuwait. OPEC quotas did not significantly affect Chevron’s production level in 2007.

The impact of OPEC quotas on the company’s production in 2008 is uncertain.

     In October 2006, Chevron’s Boscan and LL-652 operating service agreements in Venezuela were converted to Empresas Mixtas (i.e., joint-stock companies), with Petróleos de Venezuela, S.A. (PDVSA) as majority shareholder. From that time, Chevron reported its equity share of the Boscan and LL-652 production, which was approximately 85,000 barrels per day less than what the company previously reported under the operating service agreements. The change to the Empresa Mixta structure did not have a material effect on the company’s results of operations, consolidated financial position or liquidity.

     In February 2007, the president of Venezuela issued a decree announcing the government’s intention for PDVSA to take 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