U.S. markets, and we moved forward with expansion plans at our largest U.S. refineries. In Asia, we approved a major upgrade of the Yeosu Refinery in South Korea, the world’s fourth-largest refinery, to enable heavy oil processing. 

Our planned capital and exploratory spending pro- gram for 2006 is $14.8 billion, a 34 percent increase over 2005. This level of investment is aligned with our strong queue of growth projects and our commitment to bring new energy supplies to market. 

COMPETITIVE ADVANTAGE The operating environment for the energy industry continues to be challenging. With a sustained increase in global demand, tight supplies and a dynamic geopolitical situation, we continue to believe our industry is dealing with a fundamentally new energy equation. To some extent, risk in our industry has shifted from below ground – where Chevron has proved extremely effective at finding and producing hydrocarbons – to above ground, where challenges include access to resources, barriers to the free flow of capital investment to produce those resources and the economic development of infrastructure needed to connect energy supplies to markets. 

In this environment, the competitive advantage will go to companies that demonstrate sustained performance and operating excellence, apply new technology in ways that drive results, and create partnerships that enable the efficient execution of complex cross-border projects. These are all core capabilities of Chevron. 

HUMAN ENERGY: THE HEART OF CHEVRON Our success in 2005 was defined by a number of factors – robust strategies, consistent execution, a safety record that is among the best in our business, innovative technology and strong commodity prices. But the fundamental contributor to our success is the people of Chevron. Their dedication, resourcefulness and sheer ingenuity were on display throughout the year and were dramatically high- lighted in our response to Hurricanes Katrina and Rita. Whether it was Chevron employees helping each other, assisting the community or working to restore energy supplies to the marketplace as quickly as they did, their actions were truly heroic. 

It is our people who develop our strategies, build our partnerships, create new technology, ensure that we operate safely and ethically, and manage the great risks that are part of our business. It is this “human energy” that this year’s Annual Report celebrates. It is at the heart of Chevron. And it will continue to drive our mission to deliver safe, clean and reliable energy to fuel economic growth and human progress. 

Thank you for your continued support. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS ENVIRONMENT AND OUTLOOK

The company’s current and future earnings depend largely on the profitability of the 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. Overall earnings trends are typically