produced in North America and the inventory in underground storage to meet customer demand.

     In contrast to the United States, certain other regions of the world in which the company operates have different supply, demand and regulatory circumstances, typically resulting in significantly lower average sales prices for the company’s production of natural gas. (Refer to page FS-12 for the company’s average natural gas prices for the U.S. and international regions.) Additionally, excess supply conditions that exist in certain parts of the world cannot easily serve to mitigate the relatively high-price conditions in the United States and other markets because of lack of infrastructure and the difficulties in transporting natural gas. To help address this regional imbalance between supply and demand for natural gas, Chevron is planning increased investments in long-term projects in areas of excess supply to install infrastructure to produce and liquefy natural gas for transport by tanker, along with investments and commitments to regasify the product in markets where demand is strong and supplies are not as plentiful. Due to the significance of the overall investment in these long-term projects, the natural gas sales prices in the areas of excess supply (before the natural gas is transferred to a company-owned or third-party processing facility) are expected to remain well below sales prices for natural gas that is produced much nearer to areas of high demand and that can be transported in existing natural gas pipeline networks (as in the United States).

     Longer-term trends in earnings for the upstream segment are also a function of other factors besides price fluctuations, including changes in the company’s crude oil and natural gas production levels and the company’s ability to find or acquire and efficiently produce crude oil and natural gas reserves. Most of the company’s overall capital investment is in its upstream businesses, particularly 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.

     Chevron’s worldwide net oil-equivalent production of approximately 2.5 million barrels per day in 2005, including volumes produced from oil sands and production under an operating service agreement, remained essentially unchanged from 2004. However, production in the fourth quarter 2005 was nearly 2.7 million barrels per day, reflecting the benefit of volumes associated with the properties acquired from Unocal, the effect of which was partially offset by production shut in as a result of the hurricanes in the Gulf of Mexico. Prior to the hurricanes in August and September 2005, oil-equivalent production in the Gulf of Mexico was approximately 300,000 barrels per day. In 2006, production is projected to average approximately 200,000 barrels per day, as normal field declines are expected to exceed the production being restored from wells that were shut in or damaged from the hurricanes and the production that will result from the drilling of new wells in the area. Approximately 20,000 net oil-equivalent barrels of daily production