Chevron 2004 Annual Report Download - page 29

CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT 27
Comments฀related฀to฀earnings฀trends฀for฀the฀company’s฀
major฀business฀areas฀are฀as฀follows:
Upstream฀ Year-to-year฀changes฀in฀exploration฀and฀produc-
tion฀earnings฀align฀most฀closely฀with฀industry฀price฀levels฀for฀
crude฀oil฀and฀natural฀gas.฀Crude฀oil฀and฀natural฀gas฀prices฀are฀
subject฀to฀external฀factors฀over฀which฀the฀company฀has฀no฀con-
trol,฀including฀product฀demand฀connected฀with฀global฀economic฀
conditions,฀industry฀inventory฀levels,฀production฀quotas฀imposed฀
by฀the฀Organization฀of฀Petroleum฀Exporting฀Countries฀(OPEC),฀
weather-related฀damages฀and฀disruptions,฀competing฀fuel฀prices,฀
and฀regional฀supply฀interruptions฀that฀may฀be฀caused฀by฀military฀
conflicts,฀civil฀unrest฀or฀political฀uncertainty.฀Moreover,฀any฀of฀
these฀factors฀could฀also฀inhibit฀the฀company’s฀production฀capacity฀
in฀an฀affected฀region.฀The฀company฀monitors฀developments฀
closely฀in฀the฀countries฀in฀which฀it฀operates฀and฀holds฀invest-
ments฀and฀attempts฀to฀manage฀risks฀in฀operating฀its฀facilities฀
and฀business.฀Longer-term฀trends฀in฀earnings฀for฀this฀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.฀
The฀level฀of฀operating฀expenses฀associated฀with฀the฀efficient฀
production฀of฀oil฀and฀gas฀can฀also฀be฀subject฀to฀external฀factors฀
beyond฀the฀company’s฀control.฀External฀factors฀include฀not฀only฀
the฀general฀level฀of฀inflation฀but฀also฀prices฀charged฀by฀the฀indus-
try’s฀product-฀and฀service-providers,฀which฀can฀be฀affected฀by฀the฀
volatility฀of฀the฀industry’s฀own฀supply฀and฀demand฀conditions฀
for฀such฀products฀and฀services.฀Operating฀expenses฀can฀also฀be฀
affected฀by฀uninsured฀damages฀to฀production฀facilities฀caused฀by฀
severe฀weather฀or฀civil฀unrest.
Industry฀price฀levels฀for฀crude฀oil฀reached฀record฀highs฀dur-
ing฀2004.฀For฀example,฀the฀price฀for฀West฀Texas฀Intermediate฀
(WTI)฀crude฀oil,฀one฀of฀the฀benchmark฀crudes,฀reached฀$55฀per฀
barrel฀in฀October฀2004.฀WTI฀prices฀for฀the฀full฀year฀averaged฀
$41฀per฀barrel,฀an฀increase฀of฀approximately฀$10฀per฀barrel฀from฀
2003.฀The฀WTI฀spot฀price฀per฀barrel฀at฀the฀end฀of฀February฀2005฀
was฀approximately฀$51.฀These฀relatively฀high฀industry฀prices฀
reflected,฀among฀other฀things,฀increased฀demand฀from฀higher฀
economic฀growth,฀particularly฀in฀Asia฀and฀the฀United฀States,฀the฀
heightened฀level฀of฀geopolitical฀uncertainty฀in฀many฀areas฀of฀the฀
world,฀crude฀oil฀supply฀concerns฀in฀the฀Middle฀East฀and฀other฀
key฀producing฀regions,฀and฀production฀shut฀in฀for฀repairs฀follow-
ing฀Hurricane฀Ivan฀in฀the฀Gulf฀of฀Mexico฀in฀September฀2004.฀
During฀most฀of฀2004,฀the฀differential฀in฀prices฀between฀
high฀quality,฀light-sweet฀crude฀oils,฀such฀as฀the฀U.S.฀benchmark฀
WTI,฀and฀the฀heavier฀crudes฀was฀unusually฀wide.฀The฀upward฀
trend฀in฀prices฀in฀2004฀for฀lighter฀crude฀oils฀tracked฀the฀increased฀
demand฀for฀light฀products,฀as฀all฀refineries฀could฀process฀these฀
higher฀quality฀crudes.฀However,฀the฀demand฀and฀price฀for฀the฀
heavier฀crudes฀were฀dampened฀due฀to฀the฀limited฀number฀of฀
refineries฀that฀are฀able฀to฀process฀this฀lower฀quality฀feedstock.฀
The฀company฀produces฀heavy฀crude฀oil฀(including฀volumes฀
under฀an฀operating฀service฀agreement)฀in฀California,฀Indonesia,฀
the฀Partitioned฀Neutral฀Zone฀(between฀Saudi฀Arabia฀and฀Kuwait)฀
and฀Venezuela.
Natural฀gas฀prices,฀particularly฀in฀the฀United฀States,฀were฀also฀
higher฀in฀2004฀than฀in฀2003.฀Benchmark฀prices฀in฀2004฀for฀Henry฀
Hub฀U.S.฀natural฀gas฀peaked฀in฀October฀2004฀above฀$8.50฀per฀
thousand฀cubic฀feet฀(MCF).฀For฀the฀full฀year,฀prices฀averaged฀nearly฀
$6.00฀per฀MCF,฀compared฀with฀$5.50฀in฀2003.฀At฀the฀end฀of฀Febru-
ary฀2005,฀the฀Henry฀Hub฀spot฀price฀was฀about฀$6.10฀per฀MCF.
As฀compared฀with฀the฀supply฀and฀demand฀factors฀for฀natural฀
gas฀in฀the฀United฀States฀and฀the฀resultant฀trend฀in฀the฀Henry฀Hub฀
benchmark฀prices,฀certain฀other฀regions฀of฀the฀world฀in฀which฀
the฀company฀operates฀have฀significantly฀different฀supply,฀demand฀
and฀regulatory฀circumstances,฀typically฀resulting฀in฀significantly฀
lower฀average฀sales฀prices฀for฀the฀company’s฀production฀of฀natu-
ral฀gas.฀(Refer฀to฀the฀table฀on฀page฀34฀for฀the฀company’s฀average฀
natural฀gas฀prices฀for฀the฀United฀States฀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฀developed฀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,฀ChevronTexaco฀and฀other฀companies฀
in฀the฀industry฀are฀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฀and฀
additional฀investment฀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,฀

Dollars per barrel
86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 0301 02 05

10
50
40
30
20

The฀average฀spot฀price฀of฀West฀Texas฀Intermediate,฀a฀benchmark฀crude฀oil,฀rose฀
55฀percent฀from฀the฀fourth฀quarter฀of฀2003฀to฀the฀fourth฀quarter฀of฀2004.
0
3500
2800
700
1400
2100
0.00
7.50
6.00
4.50
3.00
1.50
0100 02 03 





Prices in Dollars per Thousand
Cubic Feet (right scale)
Production in Millions of
Cubic Feet per Day (left scale)
Average฀prices฀climbed฀10฀per-
cent฀during฀2004.฀Production฀was฀
down฀16฀percent฀due฀to฀asset฀sales,฀
the฀effects฀of฀storms฀in฀the฀U.S.฀
Gulf฀of฀Mexico฀and฀normal฀field฀
declines.
0
2500
2000
1500
1000
500
0100 02 03 




Thousands of barrels per day
United States
International
Net฀liquids฀production฀declined฀
about฀5฀percent฀in฀2004,฀mainly฀
caused฀by฀asset฀sales฀and฀the฀
effects฀of฀storms.
�Includes฀equity฀in฀affiliates
(back) – v5