Chevron 2006 Annual Report Download - page 29

CHEVRON CORPORATION 2006 ANNUAL REPORT 27
Upstream Earnings for the upstream segment are closely
aligned 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 control, including
product demand connected with global economic conditions,
industry inventory levels, production quotas imposed by the
Organization of Petroleum Exporting Countries (OPEC),
weather-related damage and disruptions, competing fuel
prices, and regional supply interruptions that may be caused
by military confl icts, civil unrest or political uncertainty.
Moreover, any of these factors could also inhibit the compa-
ny’s production capacity in an affected region. The company
monitors developments closely in the countries in which it
operates and holds investments, and attempts to manage risks
in operating its facilities and business.
Price levels for capital and exploratory costs and operat-
ing expenses associated with the effi cient production of crude
oil and natural gas can also be subject to external factors
beyond the company’s control. External factors include not
only the general level of infl ation, but also prices charged by
the industry’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. The oil
and gas industry worldwide experienced signifi cant price
increases for these items during 2005 and 2006, and an
upward trend in prices may continue into 2007. Capital and
exploratory expenditures and operating expenses also can be
affected by uninsured damages to production facilities caused
by severe weather or civil unrest.
Industry price levels for crude oil generally increased in
the fi rst half of 2006 and declined in the second half. Prices at
the end of 2006 were slightly lower than at the beginning of
the year. The spot price for West Texas Intermediate (WTI)
crude oil, a benchmark crude oil, averaged $66 per barrel in
2006, an increase of approximately $9 per barrel from the
2005 average price. The rise in crude oil prices between years
refl ected, among other things, increasing demand in growing
economies, the heightened level of geopolitical uncertainty
in some areas of the world and supply concerns in other key
producing regions. For early 2007 into late February, the WTI
spot price averaged about $56 per barrel.
As was the case in 2005, a wide differential in prices
existed in 2006 between high-quality, light-sweet crude oils
(such as the U.S. benchmark WTI) and heavier types of
crude. The price for the heavier crudes has been dampened
because of ample supply and lower relative demand due to
the limited number of refi neries that are able to process this
lower-quality feedstock into light products (i.e., motor gaso-
line, jet fuel, aviation gasoline and diesel fuel). The price
for higher-quality, light-sweet crude oil has remained high,
as the demand for light products, which can be more easily
manufactured by refi neries from light-sweet crude oil, has
been strong worldwide. Chevron produces heavy crude oil in
California, Chad, Indonesia, the Partitioned Neutral Zone
between Saudi Arabia and Kuwait, Venezuela and in certain
fi elds in Angola, China and the United Kingdom North Sea.
(Refer to page 35 for the company’s average U.S. and interna-
tional crude oil prices.)
In contrast to price movements in the global market for
crude oil, price changes for natural gas are more closely aligned
with regional supply and demand conditions. In the United
States during 2006, benchmark prices at Henry Hub aver-
aged about $6.50 per thousand cubic feet (MCF), compared
with about $8 in 2005. For early 2007 into late February,
prices averaged about $7 per MCF. Fluctuations in the price
for natural gas in the United States are closely associated with
the volumes produced in North America and the inventory in
underground storage relative to customer demand. Natural gas
prices in the United States are also typically higher during the
winter period when demand for heating is greatest.
In contrast to the United States, certain other regions of
the world in which the company operates have different sup-
ply, demand and regulatory circumstances, typically resulting
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