of safety-related incidents to zero. 

CHEVRON’S ENERGY PORTFOLIO :: We expect global demand for energy to continue growing. At the same time, increased competition for resources and heightened geopolitical risks are challenging customary supply growth options. In this kind of environment, energy portfolio diversification is an increasingly important means for supplying consumers around the globe with affordable, reliable energy. 

Our current asset and investment portfolio is diverse. We have a strong queue of capital projects in progress, and our capital and exploratory budget for 2007 of $19.6 billion reflects the concentrated development phases of many of these key projects. Our investments are focused on creating new legacy positions in key conventional energy basins, expanding our assets and capabilities in unconventional resources, and investing in emerging sources of energy such as gas-to-liquids and biofuels. This portfolio, with investments balanced by location, by energy source and by time to first pro- duction, offers a strong foundation for sustained growth in even the most challenging of environments. 

HUMAN ENERGY :: At the center of our energy port- folio are the men and women of Chevron, our “human energy.” They run our operations safely, reliably and efficiently, in even the toughest conditions. They develop technology that improves our operations today and creates new business opportunities for tomorrow. They ensure we contribute to a better quality of life in every community where we operate. 

The people of Chevron have a pioneering and ingenious spirit that enables the company to continue expanding the boundaries of energy. They understand the importance of energy to global economic growth and human progress, and they are committed to securing the energy the world needs in innovative and value-creating ways. I am proud to be part of the team. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS 

BUSINESS ENVIRONMENT AND OUTLOOK

Chevron’s current and future earnings depend largely on the profitability of its upstream (exploration and production) and downstream (refining, marketing and transportation) business segments. The single biggest factor that affects the results 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. The overall trend in earnings is typically less affected by results from the company’s chemicals business and other activities and investments. Earnings for the company in any period may also be influenced by events or transactions that are infrequent and/ or unusual in nature. Chevron and the oil and gas industry at large are currently experiencing an increase in certain costs that exceeds the general trend of inflation in many areas of the world. This increase in costs is affecting the company’s operating expenses for all business segments and capital expenditures, particularly for the upstream business.

     To sustain its long-term competitive position in the upstream business, the company must develop and replenish an inventory of projects that offer