and gas exploration and production activities. The estimates of crude oil and natural gas reserves are important to the timing of expense recognition for costs incurred.

     The discussion of the critical accounting policy for “Impairment of Property, Plant and Equipment and Investments in Affiliates,” on page FS-23, includes reference to conditions under which downward revisions of proved reserve quantities could result in impairments of oil and gas properties. This commentary should be read in conjunction with disclosures elsewhere in this discussion and in the Notes to the Consolidated Financial Statements related to estimates, uncertainties, contingencies and new accounting standards. Significant accounting policies are discussed in Note 1 to the Consolidated Financial Statements, beginning on page FS-34. The development and selection of accounting estimates and assumptions, including those deemed “critical,” and the associated disclosures in this discussion have been discussed by management with the audit committee of the Board of Directors.

     The areas of accounting and the associated “critical” estimates and assumptions made by the company are as follows:

     Pension and Other Postretirement Benefit Plans The determination of pension plan expense is based on a number of actuarial assumptions. Two critical assumptions are the expected long-term rate of return on plan assets and the discount rate applied to pension plan obligations. For other postretirement employee benefit (OPEB) plans, which provide for certain health care and life insurance benefits for qualifying retired employees and which are not funded, critical assumptions in determining OPEB expense are the discount rate applied to benefit obligations and the assumed health care cost-trend rates used in the calculation of benefit obligations.

     Note 21, beginning on page FS-50, includes information for the three years ending December 31, 2005, on the components of pension and OPEB expense and on the underlying assumptions as well as on the funded status for the company’s pension plans at the end of 2005 and 2004.

     To estimate the long-term rate of return on pension assets, the company employs a rigorous process that incorporates actual historical asset-class returns and an assessment of expected future performance and takes into consideration external actuarial advice and asset-class factors. Asset allocations are periodically updated using pension plan asset/ liability studies, and the determination of the company’s estimates of long-term rates of return are consistent with these

studies. The expected long-term rate of return on United States pension plan assets, which account for 72 percent of the company’s pension plan assets, has remained at 7.8 percent since 2002.

     The year-end market-related value of assets of the major U.S. pension plan used in the determination of pension expense was based on the market value in the preceding three months as opposed to the maximum allowable period of five years under U.S. accounting rules. Management considers the three-month period long enough to minimize the effects of distortions from day-to-day market