• Financial Highlights
• Management's Discussion and Analysis
  • Key Financial Results
  • Income by Major Operating Area
  • Business Environment and Outlook
  • Operating Developments
  • Results of Operations
  • Consolidated Statement of Income
  • Selected Operating Data
  • Liquidity and Capital Resources
  • Financial Ratios
  • Guarantees, Off-Balance-Sheet Arrangements and Contractual Obligations, and Other Contingencies
  • Financial and Derivative Instruments
  • Transactions with Related Parties
  • Litigation and Other Contingencies
  • Environmental Matters
  • Critical Accounting Estimates and Assumptions
  • New Accounting Standards
• Consolidated Financial Statements
• Notes to the Consolidated Financial Statements
• Five-Year Operating Summary
• Five-Year Financial Summary
• Supplemental Information on Oil and Gas Producing Activities

Financial and Derivative Instruments

No material change in market risk occurred between 2006 and 2007 for the financial and derivative instruments discussed below. The hypothetical variances used in this section were selected for illustrative purposes only and do not represent the company's estimation of market changes. The actual impact of future market changes could differ materially due to factors discussed elsewhere in this report, including those set forth under the heading "Risk Factors" in Part I, Item 1A, of the company's 2007 Annual Report on Form 10-K.

Commodity Derivative Instruments

Chevron is exposed to market risks related to the price volatility of crude oil, refined products, natural gas, natural gas liquids, liquefied natural gas and refinery feedstocks.

The company uses derivative commodity instruments to manage these exposures on a portion of its activity, including firm commitments and anticipated transactions for the purchase, sale and storage of crude oil, refined products, natural gas, natural gas liquids and feedstock for company refineries. The company also uses derivative commodity instruments for limited trading purposes. The results of this activity were not material to the company's financial position, net income or cash flows in 2007.

The company's market exposure positions are monitored and managed on a daily basis by an internal Risk Control group to ensure compliance with the company's risk management policies that have been approved by the Audit Committee of the company's Board of Directors.

The derivative instruments used in the company's risk management and trading activities consist mainly of futures, options and swap contracts traded on the NYMEX (New York Mercantile Exchange) and on electronic platforms of ICE (Inter-Continental Exchange) and GLOBEX (Chicago Mercantile Exchange). In addition, crude oil, natural gas and refined-product swap contracts and option contracts are entered into principally with major financial institutions and other oil and gas companies in the "over-the-counter" markets.

Virtually all derivatives beyond those designated as normal purchase and normal sale contracts are recorded at fair value on the Consolidated Balance Sheet with resulting gains and losses reflected in income. Fair values are derived principally from published market quotes and other independent third-party quotes.

Effective with 2007 year-end reporting, the company changed the model used to quantify information about market risk for its commodity derivatives from a"sensitivity analysis" approach to Value-at-Risk (VaR). The major reason for the change is that VaR allows estimation of a portfolio's aggregate market risk exposure and takes into account correlations between trading assets. Therefore, it reflects risk reduction due to diversification or hedging activities. Most of the company's market positions are time and commodity spreads, and the company believes that VaR is a more accurate tool to measure this type of exposure than the sensitivity analysis model. The company fully developed and tested its VaR model during 2007.

VaR is the maximum loss not to be exceeded within a given probability or confidence level over a given period of time. The company's VaR model uses the Monte Carlo simulation method that involves generating hypothetical scenarios from the specified probability distribution and constructing a full distribution of a potential portfolio's values.

The VaR model utilizes an exponentially weighted moving average for computing historical volatilities and correlations, a 95 percent confidence level, and one-day holding period. That is, the company's 95 percent, one-day VaR corresponds to the unrealized loss in portfolio value that would not be exceeded on average more than one in every 20 trading days, if the portfolio were held constant for one day.

The one-day holding period is based on the assumption that market-risk positions can be liquidated or hedged within one day. For hedging and risk management, the company uses conventional exchange-traded instruments such as futures and options, as well as nonexchange-traded swaps, most of which can be liquidated or hedged effectively within one day. The table below presents 95 percent/one-day VaR for each of the company's primary risk exposures in the area of commodity derivative instruments at December 31, 2007:

Millions of dollars	2007
Crude Oil	$29
Natural Gas	3
Refined Products	23

Sensitivity analysis for the company's open commodity derivative instruments at December 31, 2007, and December 31, 2006, based on a hypothetical 10 percent increase in commodity prices, is provided in the following table:

Incremental Increase (Decrease) in Fair Value of Open Commodity Derivative Contracts Assuming a Hypothetical Increase in Year-End Commodity Prices of 10 Percent

Millions of dollars	2007	2006
Crude Oil	$(113)	$4
Natural Gas	14	10
Refined Products	(96)	(30)

The same hypothetical decrease in prices of these commodities would result in approximately the same opposite effects on the fair values of the contracts. The hypothetical effect on these contracts was estimated by calculating the fair value of the contracts as the difference between the hypothetical and current market prices multiplied by the contract amounts.

The change in the amounts between years in the table above for crude oil and refined products is associated with an increase in commodity prices, volumes hedged and the use of longer-term contracts.

Foreign Currency

The company enters into forward exchange contracts, generally with terms of 180 days or less, to manage some of its foreign currency exposures. These exposures include revenue and anticipated purchase transactions, including foreign currency capital expenditures and lease commitments, forecasted to occur within 180 days. The forward exchange contracts are recorded at fair value on the balance sheet with resulting gains and losses reflected in income.

The aggregate effect of a hypothetical 10 percent increase in the value of the U.S. dollar at year-end 2007 would be a reduction in the fair value of the foreign exchange contracts of approximately $75 million. The effect would be the opposite for a hypothetical 10 percent decrease in the value of the U.S. dollar at year-end 2007.

Interest Rates

The company enters into interest rate swaps as part of its overall strategy to manage the interest rate risk on its debt. Under the terms of the swaps, net cash settlements are based on the difference between fixed-rate and floating-rate interest amounts calculated by reference to agreed notional principal amounts. Interest rate swaps related to a portion of the company's fixed-rate debt are accounted for as fair value hedges. Interest rate swaps related to floating-rate debt are recorded at fair value on the balance sheet with resulting gains and losses reflected in income. At year-end 2007, the company had no interest-rate swaps on floating-rate debt. At year-end 2007, the weighted average maturity of "receive fixed" interest rate swaps was less than one year. A hypothetical increase or decrease of 10 basis points in fixed interest rates would have a de minimis impact on the fair value of the "receive fixed" swaps.