discern the underlying trends for the company’s businesses. This section should also be read in conjunction with the discussion in “Business Environment and Outlook” on pages FS-2 through FS-5. U.S. upstream income of nearly $4.2 billion in 2005 increased $230 million. The amount in 2004 included net special-item benefits (discussed below) of more than $300 million. Higher prices for crude oil and natural gas in 2005 and earnings from the former Unocal operations contributed approximately $2 billion to the increase between periods. Approximately 90 percent of this amount related to the effects of higher prices on heritage-Chevron production. These benefits were partially offset by the adverse effects of lower production (discussed below), higher operating expenses and higher depreciation expense associated with heritage-Chevron properties.

     Income of $3.9 billion in 2004 was $1.1 billion higher than the $2.8 billion recorded in 2003. Of this increase, $725 million resulted from the difference in the effect on earnings in the respective periods from special items and the cumulative-effect charges recorded in 2003 for the implementation of a new accounting standard. (Refer to Note 24, beginning on page FS-59, for a discussion of FAS 143, “Accounting for Asset Retirement Obligations.”) The balance of the increase from 2003 to 2004 was composed of about a $1 billion benefit from higher prices for crude oil and natural gas that was partially offset by the effect of lower production.

     The company’s average realization for crude oil and natural gas liquids in 2005 was $46.97 per barrel, compared with $34.12 in 2004 and $26.66 in 2003. The average natural gas realization was $7.43 per thousand cubic feet in 2005, compared with $5.51 and $5.01 in 2004 and 2003, respectively.

     Net oil-equivalent production in 2005 averaged 727,000 barrels per day, down 11 percent from 2004 and 22 percent from 2003. The decline between 2004 and 2005 was the result of the effects of hurricanes, property sales and normal field declines, which were partially offset by the benefit of five months of production in 2005 from properties acquired from Unocal. The lower production between 2003 and 2004 was associated with property sales, the effects of storms and normal field declines.

     The net liquids component of oil-equivalent production for 2005 averaged 455,000 barrels per day, a decline of 10 percent from 2004 and 19 percent from 2003. Absent the effects of the Unocal volumes in 2005, property sales and storms, net liquids production in 2005 declined 6 percent and 11 percent from 2004 and 2003, respectively.

     Net natural gas production averaged 1.6 billion cubic feet per day in 2005, down 13 percent and 27 percent from 2004 and 2003, respectively. Excluding the Unocal volumes in 2005, the effects of property sales and shut-in production related to storms, net natural gas production in 2005 declined 10 percent from 2004 and 20 percent from 2003.

     Refer to the “Selected Operating Data” table, on page FS-12, for the three-year comparative production volumes in the United States.

     No special items were recorded in 2005. Special items in 2004