Chevron 2004 Annual Report Download - page 30

28 CHEVRONTEXACO CORPORATION 2004 ANNUAL REPORT
Management’s Discussion and Analysis of Financial Condition and Results of Operations
the฀natural฀gas฀sales฀prices฀in฀the฀areas฀of฀excess฀supply฀(before฀
the฀natural฀gas฀is฀transferred฀to฀a฀company-owned฀or฀third-party฀
processing฀facility)฀are฀expected฀to฀remain฀well฀below฀sales฀prices฀
for฀natural฀gas฀that฀is฀produced฀much฀nearer฀to฀areas฀of฀high฀
demand฀and฀that฀can฀be฀transported฀in฀existing฀natural฀gas฀pipe-
line฀networks฀(as฀in฀the฀United฀States).
Partially฀offsetting฀the฀benefit฀of฀higher฀crude฀oil฀and฀natural฀
gas฀prices฀in฀2004฀was฀a฀5฀percent฀decline฀in฀the฀company’s฀
worldwide฀oil-equivalent฀production฀from฀the฀prior฀year,฀including฀
volumes฀produced฀from฀oil฀sands฀and฀production฀under฀an฀
operating฀service฀agreement.฀The฀decrease฀was฀largely฀the฀result฀
of฀lower฀production฀in฀the฀United฀States฀due฀to฀normal฀field฀
declines,฀property฀sales฀and฀production฀curtailments฀resulting฀
from฀damages฀to฀producing฀operations฀caused฀by฀Hurricane฀
Ivan.฀International฀oil-equivalent฀production฀was฀down฀margin-
ally฀between฀years.฀Refer฀also฀to฀page฀32฀for฀additional฀discussion฀
and฀detail฀of฀production฀volumes฀worldwide.
The฀level฀of฀oil-equivalent฀production฀in฀future฀periods฀is฀
uncertain,฀in฀part฀because฀of฀OPEC฀production฀quotas฀and฀the฀
potential฀for฀local฀civil฀unrest฀and฀changing฀geopolitics฀that฀
could฀cause฀production฀disruptions.฀Approximately฀25฀percent฀
of฀the฀company’s฀net฀oil-equivalent฀production฀in฀2004,฀including฀
volumes฀produced฀from฀oil฀sands฀and฀under฀an฀operating฀service฀
agreement,฀was฀in฀the฀OPEC-member฀countries฀of฀Indonesia,฀
Nigeria฀and฀Venezuela฀and฀in฀the฀Partitioned฀Neutral฀Zone฀
between฀Saudi฀Arabia฀and฀Kuwait.฀Although฀the฀company’s฀
production฀level฀during฀2004฀was฀not฀constrained฀in฀these฀areas฀
by฀OPEC฀quotas,฀future฀production฀could฀be฀affected฀by฀OPEC-
imposed฀limitations.฀Future฀production฀levels฀also฀are฀affected฀by฀
the฀size฀and฀number฀of฀economic฀investment฀opportunities฀and,฀
for฀new฀large-scale฀projects,฀the฀time฀lag฀between฀initial฀explora-
tion฀and฀the฀beginning฀of฀production.฀Refer฀to฀pages฀28฀through฀
30฀for฀discussion฀of฀the฀company’s฀major฀upstream฀projects.
In฀certain฀onshore฀areas฀of฀Nigeria,฀approximately฀45,000฀
barrels฀per฀day฀of฀the฀company’s฀net฀production฀capacity฀has฀
been฀shut฀in฀since฀March฀2003฀because฀of฀civil฀unrest฀and฀damage฀
to฀production฀facilities.฀The฀company฀has฀adopted฀a฀phased฀plan฀
to฀restore฀these฀operations฀and฀has฀begun฀production-resumption฀
efforts฀in฀certain฀areas.฀
As฀a฀result฀of฀Hurricane฀Ivan฀in฀September฀2004,฀production฀
in฀the฀fourth฀quarter฀was฀about฀60,000฀barrels฀per฀day฀lower฀than฀
it฀otherwise฀would฀have฀been.฀Damages฀to฀producing฀facilities฀
are฀expected฀to฀restrict฀oil-equivalent฀production฀in฀the฀first฀
quarter฀2005฀by฀approximately฀35,000฀barrels฀per฀day.฀Most฀of฀
the฀remaining฀shut-in฀production฀is฀expected฀to฀be฀restored฀in฀
the฀second฀quarter฀of฀2005.
Downstream฀ Refining,฀marketing฀and฀transportation฀earn-
ings฀are฀closely฀tied฀to฀regional฀demand฀for฀refined฀products฀
and฀the฀associated฀effects฀on฀industry฀refining฀and฀marketing฀
margins.฀The฀company’s฀core฀marketing฀areas฀are฀the฀West฀Coast฀
of฀North฀America,฀the฀U.S.฀Gulf฀Coast,฀Latin฀America,฀Asia฀and฀
sub-Saharan฀Africa.
Specific฀factors฀influencing฀the฀company’s฀profitability฀in฀
this฀segment฀include฀the฀operating฀efficiencies฀and฀expenses฀
of฀the฀refinery฀network,฀including฀the฀effects฀of฀any฀downtime฀
due฀to฀planned฀and฀unplanned฀maintenance,฀refinery฀upgrade฀
projects฀and฀operating฀incidents.฀The฀level฀of฀operating฀expenses฀
can฀also฀be฀affected฀by฀the฀volatility฀of฀charter฀expenses฀for฀the฀
company’s฀shipping฀operations,฀which฀are฀driven฀by฀the฀indus-
try’s฀demand฀for฀crude-oil฀tankers.฀Factors฀beyond฀the฀company’s฀
control฀include฀the฀general฀level฀of฀inflation,฀especially฀energy฀
costs฀to฀operate฀the฀refinery฀network.
Downstream฀earnings฀improved฀in฀2004฀compared฀with฀the฀
prior฀year,฀primarily฀as฀a฀result฀of฀increased฀demand฀and฀higher฀
margins฀for฀the฀industry’s฀refined฀products฀in฀most฀of฀the฀areas฀
in฀which฀the฀company฀and฀its฀equity฀affiliates฀have฀operations.฀In฀
2004,฀refined-product฀margins฀in฀North฀America฀and฀Asia฀were฀
at฀their฀highest฀level฀in฀recent฀years.฀Industry฀margins฀may฀be฀
volatile฀in฀the฀future,฀depending฀primarily฀on฀price฀movements฀
for฀crude฀oil฀feedstocks,฀the฀demand฀for฀refined฀products,฀inven-
tory฀levels,฀refinery฀maintenance฀and฀mishaps,฀and฀other฀factors.
Chemicals฀ Earnings฀in฀the฀petrochemicals฀segment฀are฀
closely฀tied฀to฀global฀chemical฀demand,฀inventory฀levels฀and฀plant฀
capacities.฀Additionally,฀feedstock฀and฀fuel฀costs,฀which฀tend฀
to฀follow฀crude฀oil฀and฀natural฀gas฀price฀movements,฀influence฀
earnings฀in฀this฀segment.฀
Earnings฀improved฀in฀2004฀compared฀with฀2003฀primarily฀
from฀the฀results฀of฀the฀company’s฀50฀percent-owned฀Chevron฀
Phillips฀Chemical฀Company฀LLC฀(CPChem)฀affiliate,฀which฀
recorded฀higher฀margins฀and฀sales฀volumes฀for฀commodity฀
chemicals฀and฀higher฀equity฀affiliate฀income.฀

Key฀operating฀developments฀and฀other฀events฀during฀2004฀and฀
early฀2005฀included:

North฀America฀ During฀2004,฀the฀company฀closed฀on฀the฀sale฀
of฀more฀than฀300฀producing฀properties฀and฀other฀assets฀in฀the฀
United฀States฀and฀Canada,฀generating฀proceeds฀of฀$2.5฀billion.฀
These฀sales,฀which฀accounted฀for฀
less฀than฀10฀percent฀of฀the฀oil-
equivalent฀production฀and฀reserves฀
in฀North฀America,฀were฀part฀of฀
plans฀announced฀in฀2003฀to฀dis-
pose฀of฀assets฀that฀did฀not฀provide฀
sufficient฀long-term฀value฀to฀the฀
company฀and฀to฀improve฀the฀over-
all฀competitive฀performance฀and฀
operating฀efficiency฀of฀the฀compa-
ny’s฀exploration฀and฀production฀
portfolio.฀
In฀the฀Gulf฀of฀Mexico,฀the฀
company฀awarded฀two฀major฀
engineering฀contracts฀for฀the฀
development฀of฀subsea฀systems฀
and฀a฀floating฀production฀facility฀
to฀advance฀the฀development฀of฀the฀
operated฀and฀58฀percent-owned฀
Tahiti฀prospect,฀a฀major฀deepwater฀
discovery.฀A฀successful฀well฀test฀of฀
the฀original฀discovery฀well฀was฀also฀
conducted฀in฀2004.฀Elsewhere฀in฀the฀
Gulf฀of฀Mexico,฀a฀deepwater฀crude฀
0.0
12.0
6.0
9.0
3.0
0100 02 03 04
8.2
3.1
Net proved reserves for consoli-
dated companies declined 11
percent in 2004, while affiliated
companies’ reserves climbed by
11 percent.
*Barrels of oil-equivalent
NET PROVED RESERVES
Billions of BOE*
Other International
Asia-Pacific
Indonesia
Africa
United States
Affiliates
#14A – Net Proved Reserves (front) – v7