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Report to Stockholders

By George L. Kirkland, Executive Vice President for Upstream and Gas
Chevron Corporation

Overview of Upstream and Gas

Houston, Texas, April 26, 2006

My discussion today will briefly cover Chevron's upstream and natural gas successes and accomplishments in 2005. I'll also talk about the status of some of our major projects and operational milestones for 2006.

Let's look at Chevron's upstream portfolio. As you can see, we have a strong diversified position in key basins worldwide.

In Asia, we are the largest resource holder and the number one producer in Indonesia, Thailand and the Caspian region of Kazakhstan.

In Australia, we are the top holder of natural gas resources and have a superior exploration lease position.

Moving to western Africa, we have strong producing operations in both Angola and Nigeria and have the largest leaseholdings for deepwater exploration in Nigeria.

Turning to Latin America, we have significant operations in Venezuela, Argentina, Brazil, Colombia, and Trinidad and Tobago.

Finally, in North America, Chevron is the top producer in the San Joaquin Valley and in the Gulf of Mexico shelf, and we are the largest leaseholder in the deepwater Gulf of Mexico. We are also very active in the U.S. Mid-Continent, East Coast of Canada and in the Athabasca Oil Sands.

Let me touch on our 2005 acquisition of Unocal. In addition to the immediate benefits the deal brought to our reserves and production, it strengthened our position in key growth regions, including the Asia-Pacific, the Caspian and the U.S. Gulf of Mexico.

It also added to our strong queue of projects, and we are confident that we can enhance the value of these projects by applying Chevron's world-class project management process.

In 2005, we continued our strong exploration program by making 31 new discoveries, a 58 percent success rate. Major discoveries were made in the deepwater U.S. Gulf of Mexico, Venezuela, Trinidad and Tobago, and Nigeria.

Our exploration activities are focused primarily on three key areas: the deepwater Gulf of Mexico, western Africa and Western Australia.

We also have six important exploration areas where we have significant leaseholds and are actively engaged in prospect evaluation and exploratory drilling. With success, these areas have the potential to become new focus areas.

Let's look now at some of the major projects we're pursuing that will be contributing to our growth plans.

Chevron currently has more than 20 projects with capital costs that exceed $1 billion each and over 40 projects that each exceed $500 million. The largest of these projects are called the "Big 5." These are legacy developments and are key to bringing on new production and new reserves during the next five years.

In the Gulf of Mexico we began construction on our $3.5 billion Tahiti deepwater project. Development drilling will begin this year, and first production is expected in 2008.

In Angola, we successfully completed the Benguela Belize platform, the world's 5th tallest structure, and started oil production this past January. This project was recognized by the Offshore Energy Association as the engineering "Project of the Year." First oil from the nearby Lobito and Tomboco fields will begin later this year.

Turning to Nigeria, the $5 billion Agbami project completed a number of key milestones, including the start of construction. First production is slated for 2008.

In 2005, the Gorgon gas project in Australia achieved a number of significant project milestones. The joint-venture partners signed an agreement that paved the way for the development of Gorgon and nearby gas fields. The goal is to reach our final investment decision late this year or early 2007 and deliver first LNG shipments in the 2010 to 2011 timeframe.

In Kazakhstan, the cornerstone of our growth plans is the $5.5 billion Tengiz Sour Gas Injection and Second Generation Plant project that, when completed, will significantly increase our oil production capacity from our Tengizchevroil joint venture.

These are just a few of the major projects we are pursuing. When coupled with our strong focus to efficiently produce as many barrels as we can from our existing operations, we expect to achieve production growth in excess of 3 percent per year over the next five years.

Turning now to our global natural gas business.

Natural gas is an increasingly important part of the world's energy portfolio, and Chevron is well positioned. We are making significant progress in growing a business designed to add value to the company over the long term.

Our focus is in two areas:

  • First are liquefied natural gas (LNG) initiatives designed to develop and move our large equity gas resources to fast-growing markets in North America and Asia.
  • The second is gas-to-liquids (GTL), that is, making high-performing, ultra-clean transportation fuels and other products from natural gas. We're developing a global business to meet this growing demand.

The catalyst to realizing our strategy is linking our resource base with attractive markets in a way that produces competitive advantage.

Our objectives in building an Atlantic Basin value chain are to link western African and Venezuelan LNG with U.S. markets, leverage our U.S. marketing and trading position, and integrate with our upstream and downstream operations.

In 2005, we moved closer to achieving those objectives when we increased our capacity at Cheniere's Sabine Pass LNG import terminal in Louisiana and began the permitting process for an LNG import terminal next to our Pascagoula Refinery in Mississippi.

We also moved forward on our Angola LNG and Olokola LNG projects in Africa and are one of only five companies being considered for participation in the Shtokman LNG project in Russia.

At our Gorgon venture in the Pacific Basin, we signed Heads of Agreement with three Japanese utilities for the sale of Gorgon LNG, an important first step in commercializing Gorgon's vast natural gas resources.

Now I would like to talk briefly about the second area of focus in our gas strategy: grow our gas-to-liquids business.

Together with our Sasol Chevron joint venture, we are building a worldwide GTL business at a time when demand for clean transportation fuels is growing.

We made significant progress in this business in 2005.

In Nigeria, with the Nigeria National Petroleum Company, we broke ground for a world-class GTL export plant scheduled to come online in 2009. It will produce high-quality diesel fuel and naphtha, primarily for export to Europe.

In closing, 2005 was a year of strong momentum. We made significant progress in advancing our upstream and natural gas strategies to grow profitability and build new legacy positions.

Now I would like to introduce Mike Wirth, who will discuss Downstream.

Read the Overview of Downstream by Mike Wirth

Updated: April 2006