Document B81Dajvqq8ZbMOKvO54KMd5OJ

55t OWWWJ Chevron PLAINTIFFS EXHIBIT . , CHV-69 'Spfefc 1997 Annual Report " 14 Chevron: cere / if i 4 'mti, n A#* H/T'-y-' :/ 7 _ \>V [CHEV BB 10002706 Table of Contents 1 To Our Stockholders 3 Financial Highlights i ! 4 Operating Highlights 6 Chevron at a Glance 7 Building on Success Record performance arid a strong financial base set the stagefor continued growth Strategies for Success 10 Build a committed team 10 Accelerate international growth in exploration and production 14 Accelerate growth in the Caspian region 14 Maintain North American exploration and production value 17 Achieve topfinancial performance in U.S. refining and marketing 19 Continue Caltex growth in attractive markets 21 Improve competitivefinancial performance in chemicals 21 Be selective in other businesses 22 Reduce costs across all activities 23 Report on the Environment 24 Glossary of Energy and Financial Terms 25 Financial Review 62 Eleven-Year Financial Summary 64 Eleven-Year Operating Nummary 65 Board of Directors 66 Officers The Chevron Way sets forth the company's key objectives and I ]I || ;' j principles, including this slateme it on Protecting People and the Environ ment: We are committed to protecting the safety and health of people and the environment. We will conduct; our business in a socially responsible and ethical manner. Our goal is to be the industry leader in safety and health performance, and to be recognized worldwide for environmental excellence. We will achieve this goal through: Safety: Safety is everyone 's responsibility. Design, operate and maintain our facilities to prevent injury, illness and incidents. Compliance: Establish processes to ensure that all of us understand | ii || our roles and all operations are in compliance. Pollution Prevention: Continually improve: our processes to minimize pollution and waste. 1| Community Outreach: Cc mmurjicate openly with the public regarding possible impact ol our business on them or the environment. Product Stewardship: Ma nage potential risks of our products with everyone involve^ throughout the products life cycles. Conservation: Conserve company and natural resources by continually improving our processes and measuring our progress. Advocacy: Work cooperatively with public representatives to base laws and regulations oh sound risk management and cost-benefit principles. Whenever possible, Chevron prints on recycled and recyclable paper, the company has punted its Annual Reports on recycled paper since 1990. Property Transfer: Assess and manage environmental liabilities prior to any property transaction. Transportation: Work wit a our carriers and distributors to ensure Safe distribution of our produc is. Emergency Response: Be prepared for any emergency and mitigate any incident quickly. Co\ er photos (clockwise from top): A Chevron service station in Pasadena, Calif.; the recently expanded Pori Anhur, Texas, petrochemicals plant; and Britannia, Chevron's tiewest North Sea platfo CHEV BB 0002707 To Our Stockholders 1997 was an outstanding year for Chevron. Our record setting income of $3,256 billion was up 25 percent over 1996, which had been the best year in our history. We surpassed our goal of $3 billion in earn ings a year ahead of schedule. That goal and the others we've achieved have paid off for Chevron's stockholders. In 1997, our total stockholder return (dividends plus stock appreciation) was 22.1 percent. The average over the past nine years has been 19.2 percent, tops among our oil industry peers. Our return on capital employed (excluding special items) was 14.7 percent, bettering our 12 percent goal for the second straight year. A kev contributor to success A major factor in our record year was the outstanding performance of Chevron's U.S. refining, marketing and transportation opera tions, which had their best year since 1988. Operating earnings of S662 million were more than double the 1996 level. Our strategy of emphasizing the value of the Chevron brand name, focusing on reducing costs and main taining incident-free operations paid off in a strong market with higher gasoline demand and improved sales margins. Reserves replacement - Chevron replaced 142 percent of the oil and gas it produced (excluding the effects of sales and acquisi tions), making 1997 the fifth straight year that replacements exceeded production. Chevron has had the best reserves replacement rate among its peer competitors over the past five years. At year-end, worldwide proved reserves stood at nearly 6.2 billion barrels of oil and equivalent gas. Saving money pays off Reducing costs remains a major part of our strategy. Since 1991, we've cut annual oper ating expenses about SI.8 billion. Moreover, 1997 was a breakthrough year. After three years of relatively flat per-barrel costs, we reduced our costs 7 percent to $5.68 a barrel. Overall, we reduced our cost structure by $400 million last year. Additional measures of success In the petroleum industry there are many important measures of success, and Chevron also has excelled in these. They include: Oil and gas production - At nearly 1.5 mil lion barrels a day, production was the highest in 12 years. International production, where we've concentrated our efforts, climbed for the eighth straight year - up 4 percent over 1996. Building on success Although both 1996 and 1997 were record setting years, success is not a short-term phenomenon. Success is what you plan for and build on. Success comes as part of a con tinuous cycle - opportunity, growth, success. Underlying Chevron's success is a solid, long-range plan. It's this plan that helps us find, create and make the most of our oppor tunities for our stockholders. CttEv 000^08 Worldwide opportunities abound We're looking forward to great growth oppor tunities, including the following: Chevron has made two giant oil discoveries (Kuito and Landana) in deep water offshore Angola. Each field is estimated to hold more than 500 million barrels of recoverable oil. Chevron's share is 31 percent. To the north, offshore the Republic of Congo, two new deep water discoveries hold commercial promise. Deepwater areas also are promising in the Gulf of Mexico, where first oil from our Genesis project is expected by year-end. The Hibernia project offshore Newfoundland is changing the economic scene in east ern Canada. Production started in November, and peak production of 150,000 barrels a day is expected by mid-1999. Equally important, the enormous platform will be a hub for other potential production in the area. Production from a project in Venezuela's Lake Maracaibo is forecast to exceed 100,000 barrels of oil a day in five years. At year-end, Chevron's Boscan project was ahead of sched ule and producing 89,000 barrels a day. In the North Sea, the platform for the Britannia gas field is in place, and production is scheduled to start this year. Chevron Chemical Company is building new plants in Singapore and Saudi Arabia, and is planning its first plant for China. New opportunities abound in Caspian Recognizing the enormous economic potential of the Caspian region, we have added a new strategy to our ongoing plan - to accelerate our earnings growth in the area. (See page 14.) The oil potential of the entire region is enormous. Chevron already is a leading oil producer in Kazakhstan through its 45 per cent interest in the supergiant Tengiz oil field. And we have an agreement to explore a deep water area offshore Azerbaijan. In February 1998, we signed an agree ment with Shell to develop new exploration, Average Annual Return to Stockholders Percentage 35 Return on Average Capital Employed* Percentage 16 14.7 The annual return on Chevron stock has averaged 21.7 percent over the past five years. Chevron's return on average capital employed was the highest in more than a decade. `Excluding special items production and transportation projects in the Caspian area. With our combined strength, and working closely with the governments of the region, I believe we will be able to develop infrastructure and resources on a basis not previously contemplated. We want Chevron to remain the dominant company in the region. Our new strategy also looks beyond oil and gas exploration and production. The countries in the region stand on the edge of rapid economic development, and we see the opportunity to help them progress. We have the possibility of expanding many aspects of our business and, at the same time, helping to generate wealth for the people and the coun tries of the region. Investing for the future Our planned spending for 1998 - a record S6.3 billion - underscores our commitment to growth and our confidence in the tremendous potential of our worldwide projects. I believe that Chevron has better long-term growth opportunities than any of our competitors. We plan to spend nearly $4 billion on worldwide exploration and production. Nearly S2.5 billion, or about 63 percent of that total, will be invested in international operations. CHEV BB 0002709 Financial Highlights Millions of dollars, except per-share amounts Net income Sales and other operating revenues Capital and exploratory expenditures* Total assets at year-end Total debt at year-end Stockholders' equity at year-end Cash flow from operating activities Common shares outstanding at year-end (Thousands) Average shares outstanding during year (Thousands) Per-share data Earnings - basic Earnings - diluted Cash dividends Stockholders' equity Market price at year-end Total debt/total debt plus equity Return on average stockholders' equity Return on average capital employed (ROCE) includes equity in affiliates 1997 $ 3,256 $40,583 % 5,541 $35,473 $ 6,068 $17,472 $ 4,583 655,931 654,991 '.V $ 4.97 $ 4.95 $ 2.28 $ 26.64 $ 77.00 25.8% 19.7% 15.0% 1996 $ 2,607 $42,782 $ 4,840 $34,854 $ 6,694 $15,623 $ 5,770 653,086 652,769 % Change 25% (5)% 14% 2% (9)% 12% (21)% - $ 3.99 $ 3.98 $ 2.08 $ 23.92 $ 65.00 30.0% 17.4% 12.7% 25% 24% 10% 11% 18% Total Revenues Billions of dollars 50 Net Income Millions of dollars Earnings, Excluding Special Items Millions of dollars 3500 S3,180 Revenues declined 4 per cent on lower crude oil and refined products prices and lower natural gas production. 93 94 95 96 97 Net income was S3.256 billion for 1997, the second straight year of record earnings. Chevron surpassed its goal of $3 billion in earnings one year earlier than targeted. CHEV BB 0002710 CnfcVRuN CORPORATION 1 9 9 7 ANh ripok: 0{ktating Highlights Net production of crude oil and natural gas liquids'(Thousands of barrels per day) Net production of natural gas' (Millions of cubic feet per day) Sales of natural gas' (Millions of cubic feet per day) Refinery input' (Thousands of barrels per day) Sales of petroleum products' (Thousands of barrels per day) Net proved reserves of crude oil, condensate and natural gas liquids' (Millions of barrels) Net proved reserves of natural gas'(Billions of cubic feet) Chemicals sales revenues2 (Millions of dollars) Number of employees at year-end3 'Includes equity in affiliates 'Includes sales to other Chevron companies ! Excludes service station personnel 1997 1996 % Change 1,074 2,425 4,530 1,498 2,254 4,506 9,963 53,633 34,186 1,043 2,459 4,366 1,488 2,289 4,364 10,317 $3,541 35,310 3% (1)% 4% 1% (2)% 3% (3)% 3% (3)% Performance Measures To help achieve its goal of being No.l among its major competitors in providing total return on stockholders' investment, Chevron has set several performance measures to track its progress. Some of these are listed below and are discussed throughout this report. Terms are defined on page 24. 1997 1996 1995 Earnings, Excluding Special Items (Millions of dollars) Adjusted Operating Expenses (Millions of dollars) Operating Expenses per Barrel Return on Capital Employed, Excluding Special Items Total Stockholder Return $3,180 $7,618 $ 5.68 14.7% 22.1% $2,651 $7,832 $ 6.10 12.8% 28.5% $1,962 $7,594 $ 6.09 9.8% 22.0% Capital & Exploratory Expenditures* Millions of dollars Cash Dividends Paid Dollars per share 2.5 S2.2S Chevron Year-End Common Stock Price Dollars per share $77.00 Exploration & Production Refining, Marketing & Transportation Other Exploration and production expenditures accounted for nearly 65 percent of total spending. 'Includes equity in affiliates Annual dividends increased for the 10th consecutive year. Chevron's stock price increased 18.5 percent in 1997. CHEVBB 0002711 ivy/ AflNUAl KtKUK However, we're still planning to spend a hefty $1.5 billion on U.S. projects, focusing on deep water areas in the Gulf of Mexico. Chevron plans to invest about $1.1 bil lion in its worldwide refining, marketing and transportation projects. Nearly half of that, or $600 million, will be spent in the United States. Finally, about $800 million is ear marked for worldwide chemicals projects. Although the chemicals industry still is ham pered by a cyclical downturn, we believe that it is near an end and that there are many attractive long-term investment opportunities. Flexibility from financial strength Chevron's balance sheet is the strongest it's been in more than a decade. We've reduced debt more than $2.3 billion in the past two years. This financial strength gives us the flexi bility to pursue important new opportunities. We recently created a mergers and acquisi tions group to seek out promising business ventures, especially in exploration and pro duction. In addition, we increased our divi dend in the first quarter of 1998, the eleventh straight year of dividend increases. Financial strength and flexibility also help us maintain our focus when oil and gas prices drop. Right now, the short-term price outlook is not strong. Crude oil and natural gas prices started down in late 1997, and in the first quarter of 1998 oil prices hit their lowest level in nearly four years. Although we can't control prices, there are important factors we can control - our costs, and pro duction and sales volumes. Safety, environment are key priorities In 1997, we succeeded in implementing our "Protecting People and the Environment" program in nearly all locations worldwide. Chevron takes pride in its highly regarded record of environmental responsibility. Our policy, which is part of The Chevron Way, is stated at the beginning of this report. Jim Sullivan, Vice Chairman Employees share in success Employees have an important stake in Chev ron and benefit when the company does well. In January 1996, each employee was given 150 stock options that could be exercised when our stock price hit $75 a share for three consecutive days. This happened on June 17, 1997. In February 1998, during a worldwide employee teleconference, I announced a new stock option plan that will vest in two years. In addition, all employees are part of a Chev ron Success Sharing plan that gives bonuses when specific operational, financial and safety goals are met. Looking ahead to continuing success Our talented, hard-working employees turn our strategies into the many successes we dis cuss in this report, and 1 want to thank them for their efforts. I'm confident that they will continue to meet any challenge and carry out the plans for our many projects worldwide building a stronger Chevron and providing superior value for our stockholders. Kenneth T. Derr Chairman of the Board and Chief Executive Officer February 20,1998 CHEV BB 0002712 Chevron at a Glance Business 1 Exploration and Production Explores for and produces crude oil and natural gas in the United States and 22 other countries. Third-largest U.S. natural gas producer. Worldwide net production was almost 1.5 million barrels a day of oil and equivalent gas. 1 Refining Converts crude oil into a variety of refined products, including motor gasolines, diesel and aviation fuels, lubricants, asphalt, chemicals and other products. Chevron is one of the largest refiners in the United States. 1 Marketing One of the leading U.S. marketers of refined products, including motor gasolines, diesel and aviation fuels, lubricants and other products. Retail outlets number approximately 7,800 in the United States, 200 in Canada; Caltex supplies more than 7,900 retail out lets internationally. 1 Supply and Distribution Purchases, sells, trades and transports by pipeline, tanker and barge - crude oil, liquefied natural gas, natural gas liquids, chemicals and refined products. 1 Chemicals Main products are ethylene, benzene, styrene, normal alpha olefins, paraxylene, polyethylene, polystyrene and a variety of additives used for fuels and lubricants. 1 Coal Mines and markets coal, ranking among the top 15 coal producers in the United States. Areas of Operation Major producing areas include the Gulf of Mexico, California, the Rocky Mountains, Texas, Angola, Nigeria, Canada, the North Sea, Australia, Indonesia, Republic of Congo, China and Kazakhstan. Exploration areas include the above, as well as Alaska, Azerbaijan, Colombia, Peru and Ireland. Keys to Success 1 Balanced, high-value portfolio of internation al and North American assets. Positioned to grow in promising areas, including the Caspian, eastern Canada and Africa. Major leaseholder in Gulf of Mexico. Leader in exploration and production technology. The low-cost operator in many areas. Principal U.S. locations are ElSegundo and Richmond, Calif.; Pascagoula, Miss.; Salt Lake City, Utah; El Paso, Texas; and Honolulu, Hawaii. Also refines in Canada and (through its Caltex affiliate) Asia, Africa, Australia and New Zealand. ! Largest producer of California reformulated gasolines. Two large refineries in attrac tive California market. Pascagoula Refin ery ranks among industry pacesetters. Caltex refineries well positioned to com pete in Asia-Pacific markets. -- Chevron holds 9 percent or greater gasoline market share. Retail locations also in Canada and (through Caltex) in Asia, southern and eastern Africa, the Middle East, Australia and New Zealand. No gasolines sold provide better performance or tower emissions than Chevron gasolines with Techron additive. Among the top three gasoline marketers in 14 states. No.l mar keter of aviation fuels in the West. Conven ience-store network contributing to retail growth. Caltex is a leading marketer in many high-growth areas. Caltex re-imaging program increasing name recognition and brand appeal. Lubricants business expand ing internationally. 1 Cargo trading offices in Houston; Walnut Creek, Calif.; London; Singapore; Mexico City; and Moscow. Interests in pipelines throughout the United States and in Africa, Australia, Indonesia, Papua New Guinea, Europe and the Middle East. Tanker operations worldwide. Tanker fleet has one of the best safety and environmental records among major oil com panies. Shipping adding four new double hulled tankers. Extensive U.S. pipeline system serves key markets. Planned Cas pian pipeline will allow major growth in production from Kazakhstan's Tengiz Field. Plants in 9 states and in France, Brazil and Japan. Through affiliates and sub sidiaries, operates or markets in more than 80 countries. Mines in New Mexico, Wyoming, Alabama and Kentucky; partnership interests in Illinois, Indiana, Montana and Venezuela. 1 Low-cost producer of high-purity benzene and paraxylene using Aromax and Eluxyl hybrid technologies. Expanded U.S. facil ities will boost overall product volumes by about 25 percent. International expan sion is under way in order to benefit from global demand growth. 1 Industry leader in providing return on assets. Reserves of low-sulfur, environ mentally desirable coal growing. One of the industry's best safety records. CHEVBB 0002713 Record performance add a strong fjnandal base set the stage for continued growth j Chevron has experienced an extraordinary period of achievement, with 1996 anid 1997 botiibeing record-s^tinc years. The temptation iH to think it doesn't get much better than this. But the realised so far serve as a springboard for addi tional growth in many areas at a time when arc numerous and com pelli ag. They also will serve as a strorig base in the tougher times that inevitably lie: some where ahead. is one measure of performance. But the foundation upon which Chevron is building is multifaceted. To ii t i build, on success also is to expand into new business relationships, to increase brand recognition, to valu^ tf^e com- munjities where Chevron opera :es, to employ i 'I | innovative technology arid to unleash the creativity of committed employees. It means TMevbb 10002714 hanking on a hard-earned reputation for environmental stewardship. It means enhancing the company's appeal as the around the world. Building on success also means taking i ii In 1993, Chevron took a ri^k il i i1 when it became a founding partner 1: i of Tcngizchevroil, a joint venture ! ;I with the Republic of Kazakhstan | i i ! i and the first such alliance between a former Soviet Union republic and a major Western corporation. 1 i Chevron is building on success in Kazakhstan and expanding its presence in the pdfroleum-rich i Caspian region, one bf the hottest ;: | growth areas for the petroleum industry. (See page l4 for infor mation on Chevron's Uewest strategic intent.) Additional i i i processing facilities are being constructed to handle increased Tengiz output, and progress is being made on an export pipeline to the Black Sea that will help realize Tengizchevroil's full potential. The risk taken in Kazakhstan, results have shown, was well considered. Azerbaijan sees new oil boom. One of the worlds oldest oil-producing nations. Azer baijan is playing a pivotal role in the high-stakes Cas pian region, estimated to hold up to 200 billion barrels of oil and gas, and eliciting comparisons with the Persian Gulf. In August, Chevron agreed to explore the deep water Absheron Block in the southern Caspian Sea - its first major venture in Azerbaijan. Every major oil company and many smaller ones now have a presence in Baku. Azerbaijans capital. In the new frenzy of activity, Chevron stands out as a leader in the Caspian. It already has earned a reputation for envi ronmental responsibility, technical know-how and a commitment to the prosperity of Central Asian nations. In the new frenzy of activity. Chevron stands out as a leader in the Caspian. Global operations expand. In many other parts of the world. Chevron also is building on a solid foundation of accomplishments. Late last year, the giant Hibernia project offshore Newfoundland began production and by 2000 will supply an estimated 7 percent of Canadas total production. Equally important, Hibernia will serve as a hub for further oil and gas devel opment in the area. A 3-D computer model ofthe Hibernia Field, created from seismic data. 00011'5 Chevron is committed to exploration and production in the Gulf of Mexico's deep water, an exciting frontier. The company's first deepwater project, called Genesis, is expected to begin production in December, and develop ment of other nearby prospects is being evaluated. With more than 360 deepwater leases, Chevron is well posi tioned for the future. The Gulf of Mexico is the proving ground for deep water technology. What the company learns there, it uses in other promising deepwater locations - Angola and Australia, for example. Key to this technology transfer - and more broadly, to the rapid sharing of all types of information - is a standardized computing envi ronment, now being installed throughout Chevron and expected to be complete by mid-1998. Key to this technology transfer... is a standardized computing environment .... In 1997, Chevron began production from the North Ndola Field in one of Angola's more remote offshore regions. In addition, the company recently discovered two giant deepwater fields offshore Angola, and produc tion is scheduled to start in early 1999. Operations in China, too, have bred new oppor tunities. Since 1990, Chevron and partners have been producing oil in the South China Sea and in October announced a new discovery. In its first onshore effort. Chevron is exploring for oil in the deeper zones of the Shengli Field, Chinas second largest. In addition, the company plans to build a polystyrene plant in Zhangjiagang City by 1999. Technical ability, environmental record win respect, Due to its expertise in processing heavy oil, along with its environmental reputation, Chevron was chosen to operate Venezuela's Boscan Field in 1996 and last year became operator of a consortium that won the right to boost oil production in a Lake Maracaibo field. Chevron also is evaluating a petrochemicals project in Venezuela. Retail network, petrochemicals business expand. As part of its brand management program. Chevron is expanding its U.S. serv ice station network and increasing the number of convenience stores, one of the fastestgrowing segments of the retail gasoline business. The company also aims to double the size of its petrochemicals company in five years, expanding into international markets. Success reflects many dimensions of growth. In January 1998, Chevron created a corporate mergers and acquisitions group that will look to expand the com pany's business, particularly in the areas of exploration and production. There are other ways the company is building on success. Safety records continue to improve, costreduction efforts are still paying off and Chevron's reputation as the partner of choice is being established around the world. The company's core philosophy ... is to leave a positive legacy wherever it operates. e The company's core philosophy, which has helped make Chevron a preferred partner, is to leave a positive legacy wherever it operates. This philosophy has served the company well in such diverse places as Papua New Guinea and Peru, Angola and Australia. Planning for success. The strategies for success - in new areas and old - are in place, and a combination of the abundant resources avail able to Chevron and the ample opportunities at hand may well make this period a defining one in company history. CHEV BB 0002716 9 Strategies for Success Chevron's long-range plans are guided by nine key strategies. They provide the clear strategic direction needed to carry out the company's mission: to create superior value for stockholders, customers and employees. Chevron's continued SlJCCeSS depends on how well these strategies are achieved in all the company's worldwide operations. Stock Ownership 1997 Year-End Percentage Chevron Employees - 12% Institutions - 51% Individuals - 37% Chevron's employees have a large stake in the company's success. (Employees grams for filling open jobs and developing leadership skills. Build a committed team to accomplish the corporate mission Building a committed team remains one of Chevron's primary keys to success. Com mitted employees are guided by The Chev ron Way, which provides a common set of values, a shared sense of purpose and a clear strategic direction. Employee commitment also is built by creating a sense of ownership, by main taining safe and healthy workplaces, and by developing the critical knowledge, skills and behaviors that will help give Chevron a competitive advantage. Employees are major stakeholders. Chevron's employees own a significant part of the com pany and share in its profits. About 98 per cent of eligible employees participate in Chevron's profit sharing and savings plans, cumulatively owning 76.6 million shares, or 12 percent of the total outstanding shares. In addition, Chevron Success Sharing and employee stock option plans reward employ ees with incentive pay when the company meets financial, operational and safety targets. Chevron is conducting its fifth world wide employee survey to measure opinions about work, commitment and company policies. In response to previous survey results, the company has improved its pro Chevron promotes continuous learning. The company has created a new Learning and Development organization to help em ployees continually enhance their learning skills. The organization is designed to help meet the business and personal challenges of a changing and increasingly competitive marketplace. O nternational Upstream Accelerate exploration and production growth in international areas Chevron's portfolio of international up stream assets continues to drive the compa ny's growth. These assets generated earnings of about $1.2 billion in 1997. Production, reserves continue to rise. NonU.S. net production increased for the eighth year in a row, reaching a daily average of 827,000 barrels of oil and gas equivalent, up 4 percent from 1996. Proved oil and gas reserves also climbed for the eighth consecutive year, reaching 4.1 billion equivalent barrels and replacing 127 percent of the volume produced. -- CHEV BB (WK12717 Highlights - International Upstream* Millions of dollars Earnings, Excluding Special Items Capital and Exploratory Expenditures Net Liquids Production (MBPD) Net Natural Gas Production (MMCFPD) Net Liquids Reserves (MMBbl) Net Natural Gas Reserves (BCF) MBPO Thousands of barrels par day; MMCFPD Millions of cubic feet per day; MMBbl - Millions of barrels; BCF - Billions of cubic feet 1997 $ 1,197 $ 1,903 731 576 3,310 4,972 1996 1995 S 1.142 i $ 1,854 702 584 3,215 5,042 S 811 S 1,835 651 ; 565 , 3,156 | 4,538 i 1 `Includes Canada Planned projects, new opportunities fuel growth. To build on the continuing success of its international operations, Chevron is focusing on three important elements: con centrating exploration efforts in a few key areas, joining existing projects that fit its long-term strategies and accelerating the start-up of projects. New discoveries boost Angolan reserves. Chevron and partners have discovered a giant oil field in Angola's deepwater Block 14, in which Chevron holds a 31 percent interest. The Kuito Field is estimated to contain between 500 million and 1 billion barrels of recoverable oil. Appraisal work is continuing on this field and on a second potentially giant field, Landana, discovered in Block 14 in late 1997. The offshore South Sanha/North Ndola project began production in mid-1997, pushing Chevron's oil production in Angola to 420,000 barrels a day by year-end. First production from the South Nemba/Lomba project is expected by mid-1998. Chevron's share in both projects is 39.2 percent. First oil flows from Republic of Congo field. The Kitina Field, in which Chevron holds a 29.3 percent interest, began production in December 1997. Peak production of 45,000 barrels a day is expected by year-end. Developmental drilling continues at the deepwater Moho Field and has led to two discoveries, the first that confirm potentially commercial oil deposits in shallower geologic formations. Chevron holds a 30 percent interest in both discoveries. Nigerian oil production increases. The Gbokoda/Dibi project is scheduled to start producing oil by midyear and help push production from Chevron-operated fields to nearly 600,000 barrels a day by 2001. The Escravos Gas Project has begun processing natural gas that is produced (but not previously recovered) along with crude oil. It will nearly double its capacity by the end of 1999, when a second phase begins operations. The project produces about 73 million cubic feet of natural gas a day for the domestic market and exports 8,000 barrels a day of natural gas liquids. International Exploration & Production Capital & Exploratory Expenditures' Millions of dollars Papua New Guinea fields start production. First oil from the Gobe Main and Southeast Gobe fields is scheduled to start flowing in the first quarter of 1998. Peak production of 50,000 barrels a day is expected later this year. Chevron holds an average 15 percent share of these fields. An extended well test is producing nearly 10,000 barrels of oil a day for export from the Moran Field, which was discov ered in 1996. Along with additional seismic surveys, the well test will help determine the best method for developing the field. International spending accounted for 53 percent of 1997 worldwide exploration and production expenditures. 'Includes Canada and equity in affiliates CHEV BB 0002718 cnevron to swap North Sea assets. The company has exchanged a 12 percent inter est in its Alba oil field offshore Scotland for a 7.56 percent interest in Statoil's Draugen Field and varying interests in additional exploration acreage offshore Norway. This swap places Chevron in one of the world's most attractive oil and gas exploration and production regions. Production from the Britannia Field is scheduled to begin in the third quarter of 1998. Britannia is the largest gas condensate field in the U.K. North Sea, with estimated recoverable reserves of 3 trillion cubic feet of natural gas and 145 million barrels of condensate and natural gas liquids. Chev ron's share is 30.2 percent. Indonesian affiliate keeps top spot. Caltex Pacific Indonesia - Chevron's 50 percentowned affiliate - produced an average of 765.000 barrels of oil a day in 1997, about half of Indonesia's total. Enhanced oil recovery projects at major fields such as Minas and Duri will help maintain this level beyond 2000. Tengiz production headed up. Expanded capacity at the giant Tengiz Field in west ern Kazakhstan is scheduled to increase production from 155,000 to 185,000 barrels of oil a day by mid-1998. Chevrons share of Tengiz is 45 percent. An additional expansion is under way to raise capacity to 240.000 barrels a day. Long term, the key to unlocking Tengiz's full potential is an export pipeline to the Black Sea. Chevron holds a 15 percent interest in the Caspian Pipeline Consortium, and the pipeline could be ready in 2000. Meanwhile, oil is being exported by rail, pipeline and barge from Tengiz to the Baltic and Black Seas. Additional export routes, including rail shipment to China, are being developed. Chevron to explore in the Caspian Sea. As part of its strategy to expand its operations in Central Asia, Chevron has signed an agreement with the Republic of Azerbaijan to explore the deepwater Absheron Block, which lies near a major producing area. Drilling could begin as early as 1999. Chev ron holds a 30 percent share. Operations expand in Venezuela. Chevron and partners have been awarded a 20-vear contract to operate the giant LL-652 Field" in Lake Maracaibo. Chevron plans to in crease production from 10,000 to 115,000 barrels of oil a day by 2006. Chevron also operates the 1.6 billionbarrel Boscan Field and plans to increase production to about 115,000 barrels a day by the end of 1998, from 80,000 barrels a day in mid-1996, when the company took over operation. Exploration to begin onshore China. Chev ron has won the right for further explo ration in the onshore Shengli Field, Chinas second-largest oil field. Chevron and partners have discovered a new oil field near four producing fields in the South China Sea, and the first well is scheduled for later this year. Chevrons share is 16.3 percent. Australian gas reserves grow. Chevron and partners continue to evaluate the Dionysus Field, a major natural gas discovery off shore Western Australia. These additional recoverable reserves - estimated at 1.3 tril lion cubic feet - will help realize Chevrons plans for a major expansion of its liquefied natural gas business in Australia. Chevron International Net Crude Oil & Natural Gas Liquids Production* Thousands of barrels per day 800 731 Net liquids production rose 4 percent, increasing for the eighth consecutive year. 'Includes Canada and equity in affiliates International Net Proved Reserves* Millions of 0EG** barrels 4500 4,138 International oil and gas reserves increased 2 per cent, with major additions from Angola, Australia and Indonesia. 'Includes Canada and eauity in affiliates "Oil and equivalent gas CHEV BB 0002720 13 holds a 50 percent share in Dionysus. The company also plans to increase liquefied natural gas production by expanding facil ities at the North West Shelf Project. average of 155,000 barrels a day. An expand ing infrastructure w'ill accommodate the increased volume expected over the next 15 years. 0 asplan Region Accelerate the growth of our Caspian area earnings by cooperatively applying the skills and talents of all Chevron organiza tions to develop infrastructure, new mar kets and regional business opportunities Chevron is both expanding its operations in Kazakhstan and pursuing a wide range of other opportunities in Central Asia, rec ognizing that the Caspian region holds tremendous potential for long-term growth. New team named; new alliance formed. In January, the company formed a senior-level team to identify the most promising oppor tunities that will complement current explo ration and production operations in the region. And in February, Chevron and Shell agreed to cooperate on new energy projects in the Caspian, including exploration, pro duction, transporation and marketing. Chevron gains experience. Through TCO, Chevron has had several years to demon strate its technical and business expertise. It also has shown its commitment to environ mental protection, to community relations and to a smooth transition for those coun tries moving from a centrally planned to a free-market economy. New offices planned. Chevron is building an office complex for up to 800 employees in Atyrau, Kazakhstan, and has opened a service station in Almaty, with others planned for Akmola and Atyrau. It also has set up a regional office in Baku, Azerbaijan, with another planned for Tblisi, Georgia. The company has formed four project teams to achieve specific new business goals in the Caspian, a region widely compared for its geologic potential - with Saudi Arabia in the 1930s. They will focus on exploration and production, refining and marketing, transportation, and community development. Kazakhstan sets pace. In a bold, pioneering move in 1993, Chevron formed Tengizchevroil (TCO), a joint venture with the Re public of Kazakhstan. Bucking the wait-andsee approach of most Western corporations after the breakup of the Soviet Union, Chev ron led the way in building relationships with newly independent Kazakhstan and other countries bordering the Caspian Sea. That move - called risky by some has paid off. Production from Tengiz has increased nearly fivefold to the 1997 daily 0orth American Upstream Generate cash from North American exploration and production operations, while maintaining value through sus tained production levels Offshore eastern Canada and deepwater Gulf of Mexico represent the main growth opportunities for Chevrons North Ameri can exploration and production. The com pany also continues to invest in mature areas for modest growth, steady production and cash flow. CHEV BB J002721 The 1.2 millioh-t|pn Hibernia Plat- form was towed intp_plape ill May I I | 11 " and bdgaijn producing oil in INjjpvejn- kber. The billion-barrel field is expected to ptPduce^fpr 20 Vear^. The $5.8 billion projett launched a new offshore industry '1 jp ij for eastern Canada anjq will serve as a hut^ for further growth ftv, r-'2$?.Tr , _ T* Playing pivotal joles on ^the Hibernia project are (left to right) l<eUy Hanna, process and fatuities engineer^ Graham Nome, team leader, production well development; Brian Smi^tiej, controls specialist, Start-Up Team. ^ _r :1 i i. Hi /' k' . NNX - ^V"uZri } -J 'rS HP?' iii i'-C t>r4:*4** -'-hi . $L_ (Ol ............ ' t',j rjl " I'"i' 1 Ri n rrti CHEV BB 0002722 jI T I I `Jr ^ oTu i3 j a j ij.u - Li~a jcT'a j; - u dp, pjU *3 b \ a o b' u` - .*^Ja a ' ,i ,4 Q ^ ^ui_n' F ! , i-V .I'M! _ U.S. Exploration & Production Capital & Exploratory Expenditures Millions of dollars 2000 1500 $1,659 Highlights - U.S. Upstream Millions of dollars, except per-share amounts Earnings, Excluding Special Items Cash Flow After Capital and Exploratory Expenditures Capital and Exploratory Expenditures Net Liquids Production (MBPD) Net Natural Gas Production (MMCFPD) Net Liquids Reserves (MMBbl) Net Natural Gas Reserves (BCF) Production Expense per OEG Barrel MBPD * Thousands of barrels per day; MMCFPD - Millions of cubic feet per day; MMBbl - Millions of barrels; BCF - Billions of cubic feet; OEG - Oil and equivalent gas 1997 $ 972 $ 1,149 S 1,659 343 1,849 1,196 4,991 S 5.47 1996 S 1,109 $ 982 $ 1,168 341 1,875 1,149 5,275 s 5.40 1995 S 552 s 672 s 879 350 1,868 1,187 5,532 s 5.11 93 94 95 96 97 Acquiring and evaluating new Gulf of Mexico leases helped push expenditures up 42 percent in 1997. U.S. Net Proved Reserves Millions of OEG' barrels 2500 1500 In 1997, North American upstream operations - Chevron U.S.A. Production Company, Chevron Canada Resources and Chevron's 28 percent interest in NGC Cor poration - contributed $1.2 billion in cash to the corporation. Operating earnings were $1.1 billion, with total liquids production up slightly from 1996 levels. Hibernia signals new Canadian era. The Hibernia Field, offshore Newfoundland, began production in November. With an estimated 650 million barrels of recoverable oil, Hibernia is expected to produce for 20 years, reaching design capacity of 150,000 barrels a day in 1999. Chevron's interest in the $5.8 billion project is about 27 percent. Chevron and partners also acquired the rights to eight exploration blocks that promise further development in the region. 1000 500 0 93 94 95 96 97 Chevron replaced its U.S. oil and gas production for the first time since 1984, excluding sales and acquisitions. 'Oil and equivalent gas Deepwater projects promise increased reserves. In the next 10 years, Chevron aims to add more than 2 billion barrels of reserves from Gulf of Mexico deepwater projects. Genesis, Chevrons vanguard proj ect - 57 percent company owned - is on course to begin producing in late 1998. The 160 million-barrel field is expected to peak in 2000 at 55,000 barrels of oil and 72 mil lion cubic feet of gas a day. Production from Gemini, a second deepwater project, is scheduled for 1999. Chevron acquired 134 16 deepwater leases in the gulf in 1997, bring ing its total to 362. Investments, sales support growth. Chev ron is a leading producer in Gulf of Mexico shallow waters, and it is investing selec tively to offset natural production declines. In California's San Joaquin Valley, the company is focusing on six core fields that provide steady production with low operat ing costs, as well as growth opportunities. Strengthening its position in Alaska, Chevron recently obtained rights to 18 ex ploration tracts on the eastern North Slope. In February, the company announced an alliance with BP Exploration Alaska to pursue opportunities near Point Thomson. Taking advantage of a strong acquisi tion market, the company received some $450 million in proceeds from sales of non core assets in 1997, with minimal loss of production. It plans additional sales over the next three years, mainly in the Gulf of Mexico and Texas. NGC expands aggressively. Chevron affili ate NGC - a leading marketer of natural gas, natural gas liquids and electricity - acquired Destec Energy, the second-largest independ ent U.S. power producer. This move signifi cantly increases NGC's power marketing business, adds power generation to NGC's services and positions it for U.S. and inter"ional growth, raw! 0002723 Highlights - U.S. Downstream Millions of dollars Earnings, Excluding Special Items Capital and Exploratory Expenditures Refined Products Sales (MBPO) Refinery Capacity (MBPD) Refinery Input (MBPD) Number of Service Stations MBPO - Thousands of barrels per day To accommodate new Gulf of Mexico production, Venice Energy Services Com pany - owned by Chevron, NGC, Shell and Koch - expanded its Venice, La., complex. Gas-gathering capacity nearly doubled to 800 million cubic feet a day, and processing capability increased from 1.0 to 1.3 billion cubic feet a day. 0.S. Downstream Achieve top financial performance in U.S. refining and marketing U.S. refining, marketing and transportation earnings, excluding special items, were $662 million - more than double last year's results. The strong improvement, continu ing a trend established in 1996, was bol stered by increased product sales volumes, improved refining reliability and a decline in both crude oil feedstock costs and oper ating expenses. Retail gasoline sales volumes in 1997 increased about 2 percent over 1996 results. At the same time, Chevron Products Com pany's operating expenses declined about $ 140 million. Safety success leads to new goal. For the second consecutive year, Chevron Products reduced its recordable injury rate, resulting in a drop of 50 percent since 1993. The 1997 S662 S520 1,193 1,046 933 7,752 1996 $290 $429 1,122 1,044 951 7,746 1995 $ 75 $892 1,117 1,044 925 7,788 company set a new goal of reducing the rate an additional 50 percent by 2000. The cost of incidents in 1997 decreased more than 40 percent from the 1996 rate. Company stresses volume growth. Chev ron's service station network is expanding as the company pursues growth opportuni ties and attracts more dealers. Chevron cur rently has under construction more than 100 new locations to be operated by independent dealers and jobbers. In addition, it plans to open more than 100 new or rebuilt companyoperated stations in both 1998 and 1999. Chevron is one of the top three gasoline marketers in 14 states and remains the No.l marketer of aviation fuels in the West. U.S. Gasoline Sales Volumes by Grade & Type Percentage Regular Unleaded - 63% Premium Unleaded - 18% Midgrade Unleaded -17% Aviation & Other - 2% Refining geared to customer needs. In refining, the emphasis is on meeting retail gasoline demands from Chevron's existing refining system. With recent West Coast upgrades completed, the company reduced capital spending on refineries by two-thirds since 1995 to about $200 million a year, a level consistent with maintaining safe, reli able operations. Convenience store sales key to growth. In addition to fuels, the company is stressing growth in convenience store goods and serv ices. These include food and beverages, and automated teller machines that, in addition to cash, dispense items such as maps and lottery, movie and baseball tickets. In the next three years, Chevron plans to increase Reformulated. Calif. - 29% Reformulated, Federal - 8% Non-Reformulated - 61% Aviation & Other - 2% Cleaner-burning reformu lated gasolines account for 37 percent of Chevron sales. CHEV BB 0002724 17 At a Houston service jstaffon^ a new 'grand. e|trartce' welcomes customers to the (^m^en^encje store, an in^pi>rta^t part pf Chev ron's retail gasoline business'. Growth in Chevron 'c-stores^ has ^federated; jThjeir number is increasing, and new stores are 50 percent larger than the current average. . r! Employees playing key roles in the c-store business include (left to right) Dok Choe, c-storeinterior designer; Scott Moline, c-store extenrior designer; Edduardo ii 1 Zubizarreta, Chevron dealer. the number of company-operated conven ience stores by 20 percent, while increasing the average store size by 50 percent. The Chevron-McDonald's alliance con tinues to grow, with some 75 sites now operating and further expansion planned through 1999. Global Lubricants business expands; cata lyst sales up. Chevron has begun a $70 million expansion of its lube oil plant in Richmond, Calif., in order to further boost quality and manufacture a broader range of products, including new premium lubes. Building on its strong base in Kazakh stan and Ukraine, Chevron plans to expand its lubricants business in Azerbaijan and Georgia, as well as in Argentina, Peru and Colombia. In 1997, Chevron licensed 170,000 ..barrels a day of its hydroprocessing tech nologies, used to make quality lubricants and fuels, and reached record catalyst sales, up 20 percent from 1996. Qaltex Caltex should achieve superior competitive financial performance, while selectively growing in attractive markets foreign exchange gains. Net income in 1997 declined to $252 million from 1996's $408 million, which included a gain from an asset sale in Japan. Operating expenses per barrel were $3.02 in 1997, down from $3.15 in 1996. Outlook calls for growth, stability. Caltex expects that growth in the Asia-Pacific region will continue to surpass that of most other regions. However, oil demand growth in the Caltex operating area is expected to slow, due to the recent economic downturn. Forecasts for 2000 have been revised down ward by 1.4 million barrels a day, or 6.5 per cent from previous estimates. Sales, acquisitions advance strategies. In 1997, Caltex sold its interest in a refinery in Bahrain and agreed to integrate the opera tions of its 64 percent-owned Star Petro leum Refinery Company Ltd. facility in Thailand with a nearby Shell refinery. To increase its retail market share in Thailand, Caltex acquired 47 British Petroleum serv ice station sites. Caltex Australia Limited, a company affiliate, gained control of Australia Petro leum Pty. Ltd., the country's No.l refiner and marketer, by buying Pioneer Interna tional's 50 percent share. Caltex Net Income* Millions of dollars 900 1997 earnings included S353 million in foreign currency gains. *100 percent basis Caltex Sales of Refined Products* Thousands of barrels per day 1500 In a year of economic turmoil and currency devaluations in the Asia-Pacific region, Cal tex responded by increasing its focus on controlling costs and managing investments. Chevron's 50 percent-owned international refining and marketing affiliate, Caltex oper ates in about 60 countries in the Middle East, Africa and the Asia-Pacific region. Operating earnings benefit from currency exchange gains. In 1997, Chevron's share of operating earnings jumped to $247 million from $127 million in 1996. due mainlv to Focus is on cost cutting, brand manage ment. To increase efficiency, reduce costs and consolidate support functions, Caltex is establishing a shared services organiza tion in Manila and a computer processing center in Singapore. The company continues to enhance the Caltex brand with its service station re imaging program, begun in 1996. It also will be a major sponsor of the Asian Games to be held in Thailand later this year. Caltex sales of refined products declined due to the sale of its interest in a Japanese refiner in 1996. *100 percent basis CHEV BB 0002726  `i i; In Singapore, Chevron is buildfincji Asia's first fuel ad^ftives plant with a^com|ilete lijpe of produ^tsj The $210 millipn plant should start operations by late 1&98. The new facility will allow the company to more quickly deliver a broader range of products to its worldwide customers. j ! Plant construction team members include | (left to rfght) Ron Jones, site manage^; Zalena Yusoff, document controller; Stephen Wong, paintin'] inspector. Highlights - Chemicals Millions of dollars Earnings, Excluding Special Items Capital and Exploratory Expenditures Chemicals Sales and Other Operating Revenues* U.S. Chemicals Division Sales (MMLb)* International Group (MMLb)* Sales of Additives (MMGal)* MMLb - Millions of pounds; MMGal Millions of gallons 0hemicals Improve competitive financial perform ance in chemicals, while developing and implementing attractive opportunities for growth The ongoing cost-control efforts of the com pany's chemicals operations offset higher natural gas costs and a sharp decline in prices for styrene and polystyrene, two of Chevron Chemical Company's core prod ucts. Operating earnings declined slightly to $224 million from S228 million in 1996, reflecting the continuing cyclical downturn in the chemicals industry. 1997 1996 1995 $ 224 $ 664 $3,633 10,562 84 153 $ 228 $ 497 $3,541 9,924 - 165 $ 524 $ 204 $3,953 9,774 - 151 'Includes sales to other Chevron companies Company prepares for worldwide upswing. Chevron Chemical also is expanding its in ternational operations to take advantage of the expected growth in global demand for petrochemicals. Construction is continuing at the company's $210 million lube oil and fuel additives plant in Singapore and at a $650 million benzene and cyclohexane facility in Saudi Arabia. Chevron Chemical also plans to build a 100,000-ton polystyrene plant in China and is working with the Venezuelan state oil company to develop a world-scale aromatics facility based on Chevron's Aromax and Eluxyl hybrid technologies. Chemicals Revenues by Division* Millions of dollars 4000 $3,633 3000 2000 93 94 95 96 97 U.S. Chemicals Additives a International & Other Sales revenues improved marginally as the cyclical downturn in the industry continued through 1997. ^Includes sales to other Chevron companies U.S. volumes head up. Chevron Chemical has expanded facilities at several U.S. plants to take advantage of expected future demand growth for petrochemicals. As part of a three-year, $2.4 billion capital program, the company has increased ethylene production capacity by 70 percent to 1.7 billion pounds a year at its Port Arthur, Texas, plant. In addition, polystyrene pro duction at the Marietta. Ohio, facility and paraxylene capacity at the Pascagoula, Miss., plant have doubled. These projects will increase overall prod uct volumes by 25 percent and help maintain the company's position as one of the lowestcost producers of key petrochemicals. O^her Businesses Be selective in other businesses Chevron's other businesses are managed primarily for cash flow and profitability, and for growth when opportunities arise. Net Coal Sales* Millions of tons 25 20 9 19.6 Canadian subsidiary leads competitors. Chevron Canada Limited, the company's Canadian refining and marketing subsidi ary, remains the largest retail marketer in British Columbia, with a 21 percent market share. Service station modernization and customer service programs led to retail gasoline and convenience store sales gains in 1997. --,, CHEV BB 0002728 93 94 95 96 97 Coal sales increased as demand for electricity rose, includes interests in affiliates 21 Operating Expenses Per Barrel* Environmental improvements continue at the company's Burnaby Refinery near Vancouver. Construction also has begun on new facilities to make reformulated gasolines that reduce auto emissions. Lower costs and higher production and sales levels reduced operating costs. 'Prior ytare restated to eliminate divested operations Coal demand recovers. Sales volumes for The Pittsburg & Midway Coal Mining Co. (P&M) have increased, and the Black Beauty Coal Company partnership has significantly expanded its operations. P&M acquired the Skull Point Mine in Wyoming from FMC Corporation. It also bought a 29.8 percent interest in Inter-American Coal, which has mining operations in Venezuela. The com pany formed two partnerships with Wesco Resources in Montana, which give it a significant position in the largest-remaining undeveloped reserve of environmentally desirable low-sulfur coal in the United States. Number of Employees at Year-End* 45000 Chevron exits U.K. marketing and refining business. Chevron has sold its marketing assets in its wholly owned subsidiary in the United Kingdom, Gulf Oil (Great Britain), including 450 service stations, a lubricants and commercial fuels business, and three fuel terminals. The company also divested its interest in a catalytic cracking facility in Pembroke, Wales. In connection with these sales, the company will shut down its 115,000-barrel-a-day refinery in Wales. Since 1991, Chevron has reduced its work force by more than 16,000. 'Excludes service station personnel 22 0 educe Costs Focus on reducing costs across all activities Cost reduction has been an important con tributor to profit growth for the past six years. Since 1991, Chevron has cut about $1.8 billion, including the impact of major asset sales and reorganizations, from its annual operating expenses. About $400 mil lion in cost cuts were achieved in 1997. These lower costs, when combined with higher volumes, pushed per-barrel operating expenses down to $5.68 in 1997 from S6.10 the previous year. To continuously reduce operating costs. Chevron is focusing on multifunctional work teams, clear priorities and the effective application of new technologies. Energy, computing and organizational efficiency yield savings. Much of the costreduction gains come from "breakthrough" projects - such as the corporatewide energy-efficiency initiative - that were started in 1991 and continue to pay divi dends. Substantial savings also are being realized through the reorganizations of North American exploration and produc tion activities, fleet operations and human resources, as well as improvements in financial services. By standardizing its worldwide com puting infrastructure - a project that will be completed in 1998 -- Chevron estimates it will save up to $30 million a year. Costs slashed for capital projects, pur chasing and steamfloods. A corporatewide initiative has cut the cost of capital projects 15 percent since 1991 by improving how they are selected, developed and executed. Through alliances, the company has reduced the number of its suppliers from 70,000 to fewer than 30,000 since 1994. For example, one alliance covers approxi mately $100 million a year in purchases of pipe used in oil and gas wells - previously split among 26 vendors - and has resulted in a cost savings of 7 percent. In California's San Joaquin Valley fields, new technology that improves heat man agement has cut costs for steamfloodingan enhanced oil recovery technique - more than 30 percent since 1991. chevbb J002729 Report on the Environment From responsible operations to contributions. Chevron's com mitment to the environment remains an integral part of the company's business philosophy. Striving to improve an already highly regarded record, nearly all Chevron operations met their "Protecting People and the Environment" program goals, fully implementing 102 management practices worldwide by year-end 1997 The program, which establishes a systematic approach to health, safety and environmental performance, stresses 10 key areas, including emergency preparedness, resource conservation and community programs. Chevron goes the extra mile. Chevron consis tently demonstrates a concern for the environ ment by sponsoring educational programs, funding research and donating natural habitats. For exam ple, Chevron Canada Resources joined three other oil companies to cede exploration rights to some 320,000 acres of coastal waters, paving the way for the first national marine conservation area on Canada's west coast. The donation will help pro tect a region rich in marine life. Lauded by Peruvian authorities. Chevron's community relations program at an exploration tract in the Amazon jungle of Peru sets an exam ple for companies operating in environmentally and socially sensitive areas. This program also earned a commendation from the Christian Emer gency Relief Team for its efforts to protect the environment, preserve the indigenous people's livelihood and improve community health. with the U.S Bureau of Land Management and the U.S. Fish and Wildlife Service. Employees lend a hand. Thousands of employees devote time and energy to such projects as tutor ing programs, Yosemite National Park restoration and bird rescues. More than 750 Chevron employ ees in Louisiana, Florida and Alabama participated in the International Coastal Cleanup, an event that spans more than 90 countries. Volunteers collected 14 tons of tin cans, tires and other garbage. Shfopjng_adds_dotibte-hulled vessels. Chevron Shipping Company has ordered four double-hulled vessels to help ensure the company's outstanding safety record. Equipped with the latest technol ogy, the tankers will join Chevron's worldwide fleet by 2000. At that time. Chevron will have 14 double-hulled tankers. Routine drills prepare employees. Response teams regularly stage emergency drills to prepare employees for possible crises, such as spills and fires, and to test the company's high-tech com munication systems. U.S. Environmental Capital Expenditures & Expenses Millions of ooltars 1500 Expensed Environmental Expenditures Capitalized Environmental Expenditures With the completion of major refinery clean-air projects in 1995, capital spending has been reduced. U.S. Occupational Incidents Per 200,000 work hours Good practices recognized. Several other Chevron operations received environmental honors. These include a Governor's award for Chevron Chemical Company's Oak Point plant in Belle Chasse, La., and an Emerald Award for an educational radio program in Alberta, Canada. Chevron also won the National Health of the Land Environmental Award, which recognized the company's environmental practices during an almost 50-year partnershiD A Chevron-built tidal wetland next to its Pascagoula, Miss., refiner/ in hnma migrator/ birds, mammals and reptiles. CHEV BB 0002730 1.0 93 94 95 96 97 Since 1993, Chevron has cut its U.S. petroleum and petrochemicals illness and injury rate by 50 percent. 23 Glossary of Energy and Financial Terms Energy Terms Additives Chemicals to control deposits and improve lubricating performance. Condensates Liquid hydrocarbons pro duced with natural gas, separated by cooling and other means. Development Following discovery, drill ing and related activities necessary to begin production of oil or natural gas. Enhanced recovery Techniques used to increase or prolong production from oil and natural gas fields. Exploration Searching for oil and/or natural gas, including geologic stud ies; topographical, geophysical and seismic surveys; and well drilling. Integrated petroleum company A com pany engaged in all aspects of the industry - from exploration and pro duction of crude oil and natural gas (upstream) to refining, marketing and transporting products (downstream). Liquefied natural gas (LNG) Gas that is liquefied under extremely cold tem peratures and high pressure to facili tate storage or transportation in spe cially designed vessels. Liquefied petroleum gas (LPG) Light gases, such as butane and propane, that can be maintained as liquids while under pressure. Natural gas liquids (NGL) Separated from natural gas, these include ethane, propane, butanes and natural gasoline. Oil equivalent gas (OEG) The volume of natural gas that can be burned to give the same amount of heat as a barrel of oil (6,000 cubic feet of gas equals one barrel of oil). Oxygenate An oxygen blending com ponent, such as ether or alcohol, that reduces exhaust emissions in winter. Petrochemicals Derived from petroleum, at Chevron they include: aromatics, used to make plastics, adhesives, syn thetic fibers and household detergents; and olefins, used to make packaging, plastic pipes, tires, batteries, household detergents and synthetic motor oils. Production Total production refers to all the oil and gas produced from a property. Gross production is the com pany's share of total production before deducting royalties. Net production is the gross production minus royalties paid to landowners. Reformulated gasoline Gasoline changed in chemical makeup to reduce exhaust emissions, usually by reducing volatil ity and aromatics content and adding oxygenates. California reformulated gasoline, with stricter requirements mandated by the state's Air Resources Board, reduces emissions more than the federally mandated formula. Reserves Oil or natural gas contained in underground rock formations called reservoirs. Proved reserves are the estimated quantities that geologic and engineering data demonstrate can be produced with reasonable certainty from known reservoirs under existing economic and operating conditions. Estimates change as additional infor mation becomes available. Recoverable reserves are those that can be produced using all known primary and enhanced recovery methods. Financial Terms Cash flow from operating activities Cash earnings of the business, an indicator of a company's ability to pay dividends and fund capital programs. Earnings Total revenues, less total expenses (including taxes). Used interchangeably with net income. Margin The difference between the cost of purchasing or producing a product and the sales price. Operating earnings Income generated by the ongoing operations of the company, excluding special items or adjustments caused by changes in accounting principles. Operating expenses per barret A key Chevron performance measure calcu lated by taking operating, selling, general and administrative expenses; adding own-use fuel costs; subtract ing special items and expenses of divested operations; and then divid ing by production and sales volumes. Return on capital employed, excluding special items (ROCE) One of Chevrons key metrics, ROCE is calculated by dividing net income (adjusted for after-tax interest expense and special items) by the average of total debt, minority interest and stockholders' equity for the year. Special items Transactions not consid ered representative of the company's ongoing operations. These transac tions, as defined by management, can obscure the underlying results of operations and affect comparability between years. Stockholders' equity The owners' share of the company, this is the difference between total assets and total liabilities. Total stockholder return An important Chevron measurement, it is the return to stockholders from stock price appre ciation and reinvested dividends for a period of time. CHEV BB 0002731 CHEVRON CORPORATION 1997 ANNUAL REPORT Financial Table of Contents 25 Management's Discussion and Analysis 37 Report of Management 38 Consolidated Financial Statements 38 Report of Independent Accountants 42 Notes to Consolidated Financial Statements 55 Quarterly Results and Stock Market Data 56 Supplemental Information on Oil and Gas Producing Activities 62 Eleven-Year Financial Summary 64 Eleven-Year Operating Summary Management's Discussion and Analysis of Financial Condition and Results of Operations 1997 HIGHLIGHTS Net income was $3,256 billion for 1997, the second consecutive year of record earnings Operating earnings were $3,180 billion, also a record Annual return on capital employed, excluding special items, was 14.7 percent, the highest in more than a decade Worldwide oil and gas reserves increased for the fifth consecutive year; international liquids production increased for the eighth consecutive year Debt was reduced by more than $600 million Annual dividend to the stockholders increased for the tenth consecutive year in 1997; another dividend increase was announced in January 1998 KEY FINANCIAL RESULTS Millions of dollars, except per-share amounts189719961995 Sales and Other Operating Revenues Net Income Special Credits (Charges) Included in Net Income Per Share: Earnings - basic - diluted Dividends Return On: . Average Capital Employed Average Stockholders' Equity $40,583 $ 3,256 $ 76 $ 4.97 S 4.95 $ 2.28 15.0% 19.7% $42,782 $ 2,607 $ (44) $ 3.99 $ 3.98 $ 2.08 12.7% 17.4% $36,310 $ 930 $ (1,032) S 1.43 $ 1.43 $ 1.925 5.3% 6.4% Chevron's net income for 1997 was a record $3,256 billion, up 25 percent from net income of $2,607 billion in 1996 and up 250 percent from $930 million in 1995. Net income bene fited $76 million from special items in 1997 and was reduced by net special charges of $44 mil U.S. Natural Gas Prices lion in 1996 and $373 million in Dollars per thousand cubic feet 1995. In addition, the adoption of a new accounting standard in 1995 reduced net income $659 million. After excluding these items, oper ating earnings for 1997 were $3,180 billion, up 20 percent from $2,651 billion earned in 1996 and up 62 percent from $1,962 billion in 1995. For the second year in a row, the company earned record profits. In spite of lower crude oil prices, the company reached its earnings goal of $3 billion, set in February 1996, one year ahead of target. Chevron's annual return on High demand and tight supplies supported natural gas prices in 1997. capital employed, excluding spe cial items, was 14.7 percent, the highest in more than a decade. OPERATING ENVIRONMENT AND OUTLOOK. The spot West Texas Intermediate (WTI) crude oil price averaged nearly $25.40 per barrel in December 1996 and began to decline in early 1997, trading in the $19--$21 range during most of the year until December 1997, when it dropped to $18.30 per barrel. The downward trend continued through January 1998, averaging about $16.70 per barrel. On February 20,1998, the WTI spot price was $16.15 per barrel. A number of factors continue to exert downward pres sure on crude oil prices. Demand growth is slowing as a result of the Asian economic slowdown and the warm winters in the United States, Europe and Japan. At the same time, supplies have been increasing because of the start-up of new produc ing fields and higher OPEC quotas and production, resulting in an oversupplied world market. It is uncertain how long these conditions will continue. In addition, inventories are ample currently and will have to be worked off before paces can rise. Lower crude oil prices in 1998 may lead to lower revenues and earnings than experienced in U.S. Net Natural Gas Production Millions of cubic feet per day 1997, particularly in the company's exploration and production 2250 (upstream) operations. However, further production increases are expected in 1998 from new devel opments in West Africa and off shore eastern Canada, where the Hibernia oil field began production in November 1997, and from con tinued expansion of production from the Tengiz Field in Kazakh stan. The company has evaluated its capital spending programs under conservative price assump tions and, at the present time, expects to fully fund its planned $6.3 billion 1998 capital and exploratory expenditure program. New development projects in the Gulf of Mexico stabilized natural gas production. CHEV BB 0002732 25 Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Quarterly U.S. Crude However, should this low price Oil Prices vs. U.S. Refined Products Sales Prices Dollars per barrel environment become more severe and prolonged, the com pany has the ability to modify its planned expenditures 35 accordingly. In the international refin " h. ing, marketing and transporta tion (downstream) segment, `V the company's Caltex affiliate's earnings have been, and will continue to be, affected by the decline in the value of Asian currencies. This has generally led to reduced refined products margins, as local prices have trailed the increased local cur 10 93 94 95 96 97 rency costs of crude oil. In cer tain Asian countries, refined Refined Products Sales Prices products prices are subject to Crude Oil Prices government-prescribed increases Over time, the price of crude oil is the major factor in deter mining refined products prices. and do not result in immediate recovery of local cost increases. In addition, the higher prices for refined products have caused demand for these products to decline. This trend has continued into 1998 and may slow the rate of growth in refined products demand that was previously expected in this region. The U.S. chemicals industry entered a cyclical downturn in the latter half of 1995 that persisted throughout 1996 and 1997. Chevron has several major chemicals expansion proj ects under way to position the company to benefit from the next upturn in the chemicals industry by lowering its unit cost structure. SIGNIFICANT DEVELOPMENTS. In April 1997, Chevron com pleted the sale of 10 percent of its 50 percent interest in the Tengizchevroil (TCO) joint venture to LUKARCO, a joint ven ture between the Russian oil company LUKoil and Arco. The company recorded a gain of $32 million from that sale in the second quarter of 1997. Total liquids production from the Tengiz Field in 1997 averaged about 155,000 barrels per day, an increase of 38 per cent over 1996 average production. In July, TCO announced the construction of a fifth oil and gas processing train at Tengiz, which is expected to boost production capacity to 240,000 barrels per day. TCO continues to successfully move crude oil by pipeline, barge and railcar. In May 1997, Chevron acquired a 15 percent interest in the Caspian Pipeline Consortium, which intends to build a direct pipeline to the Black Sea to carry crude for TCO and other regional producers. Elsewhere in this region, the company signed an agreement with the Republic of Azerbaijan to explore the Absheron offshore block in the southern Caspian Sea. In February 1998, the company announced a new Caspian region cooperative agreement with the Royal Dutch/ Shell Group. The agreement establishes a framework for the two companies to jointly identify and develop new projects in the areas of exploration, production and transportation and 1 the sale of crude oil, gas liquids and natural gas. The first Chevron production of crude oil from offshore Angola began from the Ndola and Sanha fields in Apnl and August 1997, respectively. The company has a 39 percent interest in these fields. Also, the company announced two giant crude oil discoveries in Block 14, a contract area adja cent to the company's major areas of production, which are the company's first finds in that countrys deep water. Chevro is operator and holds a 31 percent interest in Block 14. Chevron and its partners successfully bid to operate the LL-652 oil field in Venezuela's Lake Maracaibo. Chevron, witi a 30 percent interest, will operate the field under a 20-year ., contract beginning in 1998. The field currently is producing 10.000 barrels per day. The partners have submitted a devel opment plan that is expected to increase the field's production to an estimated potential of 115,000 barrels per day by 2006. The first liquefied petroleum gas (LPG) exports from the company's Escravos, Nigeria, joint venture gas project occurred in September. This project provides a commercial outlet for LPG derived from natural gas that is produced with the company's crude oil production. Chevron is planning a second phase of the project that will increase the amount of gas processed by 110 to 120 million cubic feet per day from its current level of 175 million cubic feet per day. In November, initial production began from the Hibernia oil development project, off the east coast of Newfoundland, in which Chevron has an approximate 27 percent interest. At year-end 1997, production from two wells had reached 60.000 barrels per day Chevron acquired 134 additional leases offshore Louisiana and Texas at federal sales during the year, further ing its intent to be a major participant in the development of the Gulf of Mexico's deep waters. The company's deepwater portfolio consists of 362 tracts in waters as deep as 8,500 feet, including an interest in the Genesis project, where first liquids production is expected in late 1998. Diversification Results f Percentage Liquids Production 47 U.S. 32 21 Africa 29 13 Indonesia 14 - Tengiz 7 19 Other 18 1991 OEG* Reserves 56 U.S. 33 14 Africa 19 10 Indonesia 10 - Tengiz 21 20 Other 17 Since 1991, Chevron has geographically diversified its liquids production and OEG* reserves. *0il and equivalent gas CHEV BB 26 3002733 During 1997, the company continued development of international chemicals projects including a $650 million petrochemicals complex in Al-Jubail, Saudi Arabia, that is scheduled to be completed in 1999, and a plant in Singapore to manufacture additives for fuels and lubricating oils. In the United States, the company completed major expansion and debottlenecking projects at the Port Arthur, Texas, and Mari etta, Ohio, plants. Chevron sold its marketing interests in the United King dom, including its retail network of 450 stations and its lubri cants and commercial fuels businesses, to Shell UK Ltd. in December. The company also divested its 50 percent equity interest in a 90,000-barrel-per-day catalytic cracking facility in Pembroke, Wales. In connection with these divestitures, the company also will close its 115,000-barrel-per-day refin ery located near Milford Haven, Wales, and will sell its other remaining assets, thereby completing the company's with drawal from the refining and marketing business in the United Kingdom. YEAR 2000. At year 2000, a two-digit date of "00" may not be recognized by computer systems and applications developed in the 1970s and 1980s as the year 2000, causing systems to shut down or malfunction. Chevron has established a Year 2000 Project Team to coordinate the Year 2000 efforts of teams in the company's operating units to ensure that its com puter systems and applications will function properly beyond 1999. Many of the company's information systems and soft ware are Year 2000 compliant, and others are currently being assessed for compliance. A Year 2000 compliance assessment of the embedded technology in the company's facilities and operating systems is also under way. After these assessments are complete, plans for modification or replacement, testing, and certification will be developed and implemented to ensure the company's facilities and business activities will continue to operate safely and reliably, without interruption, after 1999. The teams also are monitoring the compliance efforts of sup pliers, contractors, and trading partners with whom Chevron does business, to ensure that operations will not be adversely affected by the compliance problems of others. Until the assessments are complete, the company cannot state with cer tainty whether it has, or will have, significant Year 2000 issues. Additionally, the total amount of costs to be incurred cannot be reliably estimated at this time. However, based on the information currently available, the company has no rea son to believe that Year 2000 issues will be material to its results of operations, consolidated financial position or liquidity. ENVIRONMENTAL MATTERS. Virtually all aspects of the com pany's businesses are subject to various federal, state and local environmental, health and safety laws and regulations. These regulatory requirements continue to increase in both number and complexity and govern the company's operations and the products it sells. Most of the costs of complying with myriad laws and regulations pertaining to the company's operations and products are embedded in the normal costs of conducting its business. Using definitions and guidelines established by the American Petroleum Institute, Chevron estimates its world wide environmental spending in 1997 was about $893 mil lion for its consolidated companies. Included in these expenditures were $237 million of environmental capital expenditures and $656 million of costs associated with the control and abatement of hazardous substances and pollu tants from ongoing operations. The total amount also includes spending charged against reserves established in prior years for environmental cleanup programs, but not noncash provi sions to increase these reserves or establish new ones during the year. For 1998, total worldwide environmental capital expenditures are estimated at $265 million. These capital costs are in addition to the ongoing costs of complying with environmental regulations and the costs to remediate previ ously contaminated sites. In addition to the costs for environmental protection asso ciated with its ongoing operations and products, the company may incur expenses for corrective actions at various owned and previously owned facilities, as well as third-party waste disposal sites used by the company. An obligation to take remedial action may be incurred as a result of the enactment of laws, such as the federal Superfund law, the issuance of new regula tions or as the result of the company's own policies in this area. Accidental leaks and spills requiring cleanup may occur in the ordinary course of business. In addition, an obligation may arise when operations are closed or sold, or at non-Chevron sites where company products have been handled or disposed of. Most of the expenditures to fulfill these obligations relate to facilities and sites where past operations followed practices and procedures that were considered acceptable under standards existing at the time but now require investigatory and/or re medial work to meet current standards. The company retained certain environmental cleanup obligations when it sold the Port Arthur, Texas, refinery in 1995, and anticipated costs were accrued at the time of sale. Under the terms of the sales contract, these obligations were re-evaluated in 1997, resulting in the confirmation that previ ously recorded reserves were adequate. During 1997, the company recorded $57 million of before-tax provisions ($35 million after tax) for environmen tal remediation efforts, including Superfund sites. Actual expenditures charged against these provisions and other pre viously established reserves amounted to $205 million in 1997. At year-end 1997, the company's environmental re mediation reserves were $987 million, including $43 million related to Superfund sites. Under provisions of the Superfund law, the Environmen tal Protection Agency (EPA) has designated Chevron a poten tially responsible party (PRP), or has otherwise involved it, in the remediation of 282 hazardous waste sites. The company has made provisions or payments in 1997 and prior years for approximately 188 of these sites. No single site is expected to result in a material liability for the company at this time. For the remaining sites, investigations are not yet at a stage where the company is able to quantify a probable liability or deter mine a range of reasonably possible exposures. The Super fund law provides for joint and several liability. Any future CHEV BB 0002734 27 Management's Discussion and Analysis of Financial Condition and Results of Operations - continued Year-End Environmental Remediation Reserves Millions of dollars actions by the EPA and other regu latory agencies to require Chevron to assume other responsible par 1300 ties' costs at designated hazardous waste sites are not expected to have a material effect on the com pany's consolidated financial posi tion or liquidity. It is likely the company will continue to incur additional charges beyond those reserved for environ mental remediation relating to past operations. These future costs are indeterminable due to such factors as the unknown magnitude of pos sible contamination, the unknown timing and extent of the corrective Reserves fell as expendi tures for environmental actions that may be required, the determination of the company's remediation outpaced new accruals. liability in proportion to other re sponsible parties and the extent to which such costs are recoverable from third parties. While the amounts of future costs may be material to the company's results of operations in the period in which they are recognized, the company does not expect these costs to have a material effect on its consolidated financial posi tion or liquidity. Also, the company does not believe its obliga tions to make such expenditures have had or will have any significant impact on the company's competitive position rela tive to other domestic or international petroleum or chemicals concerns. Although environmental compliance costs are sub stantial, the company has no reason to believe they vary signifi cantly from similar costs incurred by other companies engaged in similar businesses in similar areas. The company believes that such costs ultimately are reflected in the petroleum and chemicals industries' prices for products and services. Over the past several years, the petroleum industry has incurred major capital expenditures to meet clean air regula tions, such as the 1990 amendments to the Clean Air Act in the United States. For companies operating in California, where Chevron has a significant presence, the California Air Resources Board (CARB) has imposed even stricter require ments. Over the five-year period 1991-1995, Chevron spent about $1.8 billion on capital projects to comply with air qual ity measures, the majority of which related to complying with CARB requirements for the manufacture of cleaner-burning gasoline. The bulk of this spending was completed in 1995, which resulted in a decrease in capitalized air quality expenditures from approximately $500 million in 1995 to $70 million in 1996 and $74 million in 1997. In addition to the reserves for environmental remediation, the company maintains reserves for dismantlement, abandon ment and restoration of its worldwide oil and gas and coal properties at the end of their productive lives. Many of these costs are environmentally related. Provisions are recognized on a unit-of-production basis as the properties are produced. The amount of these reserves at year-end 1997 was $1.5 bil 28 lion and is included in accumulated depreciation, depletioi and amortization in the company's Consolidated Balance Shet. For the company's other ongoing operating assets, sue', as refineries, no provisions are made for exit or cleanup cos that may be required when such assets reach the end of the useful lives unless a decision to sell or otherwise abandon t facility has been made. OTHER CONTINGENCIES. The company is a defendant in a law suit that OXY U.S.A. brought in its capacity as successor in interest to Cities Service Company. The lawsuit claims dam ages resulting from the allegedly improper termination of a tender offer to purchase Cities' stock in 1982 made by Gulf Oil Corporation, acquired by Chevron in 1984. A tnal with respect to the claims ended in July 1996 with a judgment against the company of $742 million, including interest thai continues to accrue at a rate of 9.55 percent per year while the appeal is pending. The company has filed an appeal wit! the Oklahoma Supreme Court and posted a bond for 1.5 times the amount of the judgment. Although the ultimai outcome of this matter cannot be determined presently with certainty, the company believes that errors were committed by the trial court that should result in the judgment being reversed on appeal. In a lawsuit in Los Angeles, California, brought in 1995 the company and five other oil companies are contesting the validity of a patent granted to Unocal Corporation (Unocal) for reformulated gasoline, which the company sells in Califo: nia during certain months of the year. The first two phases o. the trial were concluded in October and November 1997, with the jury upholding the validity of the patent and assess ing damages at the rate of 5.75 cents per gallon of gasoline sold in infringement of the patent between March 1 and July 1 1996. In the third phase of the trial, the judge heard evidence to determine if the patent is enforceable; the matter is cur rently under submission. While the ultimate outcome of this matter cannot be determined with cenainty, the company believes Unocal's patent is invalid and any unfavorable ruling should be reversed upon appeal. However, should the jury's findings and Unocal's position ultimately be upheld, the com pany's exposure with respect to future reformulated gasoline sales would depend on the availability of alternate formula tions and the industry's ability to recover additional costs of production through prices charged to its customers. In June 1997, Caltex Petroleum Corporation received a claim from the U.S. Internal Revenue Sendee (IRS) for $292 million in excise taxes, $140 million in penalties and $1.6 bil lion in interest. The IRS claim relates to crude oil sales to Japanese customers beginning in 1980. Caltex is challenging the claim and fully expects to prevail. Caltex believes the underlying excise tax claim is wrong and therefore the claim for penalties and interest is wrong. The Caltex claim has been through the appeals process and will next move to court. In February 1998, Caltex provided an initial letter of credit for $2.33 billion to the IRS to pursue the claim. The letter of credit is guaranteed by Chevron and Texaco. In addition, a yet to be decided portion of the claim must be paid in order to proceed to court. CHEV BB 0002735 The company is the subject of other lawsuits and claims and other contingent liabilities including, along with other oil companies, actions challenging oil and gas royalty and sever ance tax payments based on posted prices. These lawsuits and other contingent liabilities are discussed in the notes to the accompanying consolidated financial statements. The com pany believes that the resolution of these matters will not materially affect its consolidated financial position or liquidity, although losses could be material with respect to earnings in any given period. The company utilizes various derivative instruments to manage its exposure to price risk stemming from its inte grated petroleum activities. All these instruments are com monly used in oil and gas trading activities and are relatively straightforward, involve little complexity and are generally of a short-term duration. Most of the activity in these instru ments is intended to hedge a physical transaction; hence gains and losses arising from these instruments offset, and are rec ognized concurrently with, gains and losses from the underly ing transactions. The company believes it has no material market or credit risks to its operations, financial position or liquidity as a result of its commodities and other derivatives activities, including forward exchange contracts and interest rate swaps. Its control systems are designed to monitor and manage its financial exposures in accordance with company policies and procedures. The company's operations can be affected by changing economic, regulatory and political environments in the vari ous countries where it operates. Political uncertainty and civil unrest may, at times, threaten the safety of employees and the company's continued presence in a country. These factors are carefully considered when evaluating the level of current and future activity in such countries. Chevron and its affiliates continue to review and analyze their operations and may close, sell, exchange, purchase or restructure assets to achieve operational or strategic benefits to improve competitiveness and profitability. These activities may result in significant losses or gains to income in future periods. NEW ACCOUNTING STANDARDS. Effective December 1997, the company adopted two new accounting standards: Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share," and SFAS No. 129, "Disclosure of Information About Capital Structure." SFAS No. 128 requires Income Statement disclosure of both basic and diluted earnings per share in place of the primary and fully diluted earnings per share required previously. A footnote disclosure of the calcula tion method is also required. The adoption of SFAS No. 129 required no additional disclosures since the company previ ously met its requirements. In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." The company will begin reporting comprehensive income in compliance with SFAS No. 130 beginning with the first quarter 1998, while reporting under SFAS No. 131 initially will be presented in the financial statements for the year 1998. While the company is evaluating the criteria of SFAS No. 131 as they apply to Chevron's operations, it does not anticipate significant changes to its reportable segments. The statements require additional reporting and expanded disclosures but will have no effect on the company's results of operations, financial position, capital resources or liquidity. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure about Pension and Other Postretire ment Benefits" that revised disclosure requirements for pen sion and other postretirement benefits. It does not affect the measurement of the expense of the company's pension and other postretirement benefits. These new standards become effective for fiscal years beginning after December 15,1997. SPECIAL ITEMS. Net income is affected by transactions that are unrelated to, or are not necessarily representative of, the com pany's ongoing operations for the periods presented. These transactions, defined by management and designated "special items," can obscure the underlying results of operations for a year, as well as affect comparability between years. Following is a table that summarizes the gains or (losses), on an after-tax basis, from special items included in the company's reported net income. Millions of dollars Year ended December 31 1997 1996 1995 Asset Write-Offs and Revaluations $ (86) Initial Implementation of SFAS No. 121 - Asset Dispositions 183 Prior-Year Tax Adjustments 152 Environmental Remediation Provisions (35) Restructurings and Reorganizations (60) LIFO Inventory Gains (Losses) 5 Other (83) 1(337) - 391 52 (54) (14) (4) (78) $ (304) (659) 7 (22) (90) (50) 2 84 Total Special Items $ 76 $ (44) 1(1,032) Asset write-offs and revaluations in 1997 included $68 million of impairment write-downs of U.S. oil and gas proper ties, $10 million for chemical facilities and $8 million for telecommunications equipment. Asset write-offs in 1996 were related primarily to a $200 million estimated impairment pro- vision in connection with the company's intent at that time to merge its United Kingdom refining and marketing operations with those of two other oil companies. Additionally, 1996 included $68 million of impairment write-downs of oil and gas properties and related pipeline investments, a $29 million adjustment to the 1995 provision for the loss anticipated from exiting the real estate development business, including addi tional amounts for environmental remediation, and $40 mil lion for other asset write-offs. In 1995, asset write-offs of $304 million were recognized in connection with the com pany's decision to exit its real estate development business ($168 million), the completion of a comprehensive review of all the company's fixed asset records ($94 million), the write down of assets made obsolete by the new facilities required to produce California-mandated reformulated gasolines ($38 million) and other miscellaneous write-offs ($4 million). Also effective in 1995, the company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for CHEVBB 000273A 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL Condition and Results of Operations -- Continued Long-Lived Assets to be Disposed Of." The adoption of this standard required noncash charges amounting to $659 mil lion after tax, mostly related to impairment write-downs of U.S. oil and gas producing properties. Asset dispositions in 1997 increased earnings a net $183 million, including net gains of $190 million from the sales of U.S. oil and gas properties; $50 million from the sale of inter national oil and gas properties, including the sale of 10 per cent of the company's ownership interest in the TCO joint venture in Kazakhstan; and $33 million from the sale of the company's interest in a chemical affiliate. Partially offsetting these gains were charges of $90 million to increase provisions for environmental, severance and other costs associated with the company's exit from the U.K. refining and marketing business and for lease termination costs on three oceangoing vessels and their write-down to fair market value. Asset dispo sitions in 1996 increased earnings $391 million and included a $279 million gain from the company's Caltex affiliate's sale of its interest in two Japanese refineries; a net $80 million gain from the sales of producing properties in the North Sea, Indo nesia and the Gulf of Mexico; and a $32 million gain from the merger of the company's natural gas marketing business and natural gas liquids company with NGC Corporation (NGC). Prior-year tax adjustments are generally the result of the settlement of audit issues with taxing authorities or the reevaluation by the company of its tax liabilities as a result of new developments. Also, adjustments are required for the effect of changes in statutory tax rates on deferred income taxes. Favorable U.S. income tax adjustments of $142 million and a Canadian tax settlement of $10 million benefited 1997 earnings, while 1996 earnings benefited $52 million from a U.S. federal tax audit settlement. Environmental remediation provisions pertain to esti mated future costs for environmental cleanup programs at certain of the company's service stations, marketing terminals, refineries, chemical locations, and oil and gas properties; divested operations in which Chevron has liability for future cleanup costs; and sites, commonly referred to as Superfund sites, for which the company has been designated a PRP by the EPA. Provisions for future environmental remediation costs amounted to $35 million in 1997, $54 million in 1996 and $90 million in 1995. Restructurings and reorganizations in 1997 included $54 million for Chevron's share of the charge taken by its affiliate, NGC, primarily for asset write-downs and other costs associated with a planned restructuring of NGC's gas liquids and crude oil business and $6 million in connection with the reorganization of Chevron's North American exploration and production operations. Restructurings in 1996 resulted in charges of $14 million for various employee severance pro grams. Charges m 1995 were $50 million, including $12 mil lion related to restructurings at Chevron's Caltex affiliate, and consisted primarily of employee severance provisions in con nection with reorganizations of various business activities. LIFO inventory liquidation gains (losses) result from the reduction of inventories in certain inventory pools valued under the Last-ln, First-Out (LIFO) accounting method. These amounts include the company's equity share of Caltex LIFO inventory effects. Chevron's consolidated petroleum inventories were 79 million barrels at year-end 1997,83 mii lion barrels at year-end 1996 and 93 million barrels at yearend 1995. Other special items in 1997 reduced earnings by $83 million and consisted primarily of net charges for litigation and other matters, including costs associated with the com pany's employee performance stock option program. Earnim were reduced a net $78 million in 1996, consisting pnmanh of litigation matters that were offset partially by a $12 millior refund of federal lease costs. In 1995, other special items benefited earnings a net $84 million, when a gain of $86 mil lion related to a sale of land by a Caltex affiliate in Japan and a refund of $27 million for federal lease costs were offset par tially by litigation and other costs of $29 million. RESULTS OF OPERATIONS. In 1997, the company performed very well operationally and achieved record earnings for the second consecutive year. The successful 1997 performance was led by U.S. refining, marketing and transportation, whicl more than doubled its operating earnings compared with last year, benefiting from increased refined products demand and improved sales margins, reflecting both lower crude costs anc lower operating expenses. International refining, marketing and transportation earn ings also increased significantly in 1997. The higher earnings were primarily attributable to Chevron's 50 percent share of its Caltex affiliate's earnings and reflected significant after-tax currency gains, as Asian currencies generally weakened against the U.S. dollar. Despite a 7 percent decline in crude oil prices compared with 1996, upstream operating earnings were down less than 4 percent from 1996 levels. International upstream exceeded last year's record profits and increased liquids production by 4 percent, marking the eighth consecutive year of increased production. The overall production increase and lower operat ing expenses nearly offset the decline in crude oil prices. Net proved reserves increased despite higher production levels in 1997, reflecting the company's success in growing international operations and maintaining production levels in the United States. In 1997, the company estimates it replaced 115 percent of its worldwide oil and gas production through additions to proved reserves. Excluding the effects of any properties purchased or sold in 1997, the company's reserves replacement rate was 142 percent. Outside the United States, replacement of oil and gas production in Angola, Australia, Nigeria and Indonesia more than offset areas - such as Canada, the United Kingdom and Kazakhstan - where pro duction and sales of producing interests exceeded reserve replacements. In the United States, the company replaced 100 percent of oil and gas production in 1997. Excluding the effects of any properties purchased or sold in 1997, U.S. oper ations replaced 120 percent of production, the highest rate since 1984. Sales and other operating revenues were $40.6 billion in 1997, compared with $42.8 billion in 1996 and $36.3 billion in 1995. In 1997, revenues declined on lower crude oil and refined products prices and lower U.S. natural gas production. 30 CHEV BB J002737 These factors were mitigated partially by increased refined favorable swing in prior-year tax adjustments. These effects products sales volumes and higher natural gas prices. Rev were offset partially by a decrease m the proportion of equity enues improved in 1996 compared with 1995 primarily earnings recorded on an after-tax basis. because of higher prices and sales volumes for crude oil and Foreign currency effects increased net income $246 mil natural gas and higher prices for refined products, partially lion in 1997 and decreased net income $26 million and $15 offset by lower refined products sales volumes and chemicals million in 1996 and 1995, respectively, and include the com prices. Purchased crude oil and products costs were 11 per pany's share of affiliates' foreign currency effects. The foreign cent lower in 1997 compared with 1996 because of lower currency gains for 1997 primarily occurred in Australia and crude oil, refined products and chemicals feedstock prices. in the Asian operating areas of Caltex, where the currencies Sharply higher crude oil, natural gas and refined products generally weakened against the U.S. dollar. The largest cur prices accounted for the 27 percent increase in purchased rency impact was in Korea, mostly as a result of local net crude oil and products costs in 1996 compared with 1995. deferred tax benefits on local currency losses from U.S. dollar- Other income amounted to $679 million in 1997, $344 denominated liabilities. The loss on foreign currency effects million in 1996 and $219 million in 1995 and in all years in 1996 resulted from fluctuations in the value of the United included net gains resulting from the disposition of assets, Kingdom and Australian currencies relative to the U.S. dollar, which caused other income to fluctuate from year to year. and in 1995, the loss was related to fluctuations in the value Operating, selling and administrative expenses, exclud of the Canadian and Nigerian currencies. ing the effects of special items, declined 6 percent in 1997 to Effective October 1,1997, Caltex management changed $6,549 million from $6,947 million in 1996. The reduction in the functional currency for its Korean and Japanese equity operational expenses in 1997 was due to lower fuel, trans affiliates from their local currencies to the U.S. dollar, based portation and marketing costs, partially offset by the cost of on significantly changed economic facts and circumstances. the start-up and expansion of chemicals facilities. Operational Previously, the Korean petroleum industry operated in a regu expenses increased slighdy in 1996 compared with 1995, lated environment with domestic prices determined by a spe largely because higher fuel and transportation costs and cific Korean won-based return on equity. During 1997, the accruals for performance-based employee compensation costs pricing of petroleum products was moving toward a market- more than offset continued reductions in other expenses. based return. This trend was accelerated in the fourth quarter Operating expenses in 1995 were affected adversely by sched 1997 by the severe devaluation of the won, which resulted in uled and unscheduled refinery shutdowns and maintenance. higher local currency costs for U.S. dollar-based crude oil and Year ended December 31 raw materials. In addition, during this period, Caltex's Korean Millions of dollars 1997 1996 1995 affiliate significandy increased its U.S. dollar-based export sales, Reported Operating Expenses $5,280 $6,007 $5,974 moving from a net importer of refined products to a net Reported Selling, General and exporter in 1997. Administrative Expenses Total Operational Expenses Eliminate Special Charges Before Tax Adjusted Ongoing Operational Expenses 1,533 5,813 1,377 7,384 1,384 7,358 (264) (437) (514) $6,549 $6,947 $6,844 Japan also has experienced evolving deregulation in its petroleum industry. While not as material as the Korean oper ations, Caltex management decided to change the functional currency of its Japanese equity affiliate to the U.S. dollar, effective the same date as the Korean change. With the local currency as the Depreciation, depletion and amortization expense increased to $2,300 million in 1997 from $2,216 million in 1996 as a result of higher liquids production levels and SFAS No. 121 impairment write-downs of U.S. oil and gas proper ties. This was offset partially by lower expense from the reassessment and extension of the useful lives of certain U.S. chemicals assets. Expense declined in 1996 from $3,381 mil lion in 1995, which included approximately $1 billion in additional expense from the implementation of SFAS No. 121. Taxes on income were $2,246 million in 1997, $2,133 million in 1996 and $859 million in 1995, reflecting effective income tax rates of 41 percent, 45 percent and 48 percent for each of the three years, respectively. The lower tax rate in 1997, compared with 1996, primarily reflects a shift in the international earnings mix from higher tax-rate countries to lower tax-rate countries and shifts from foreign earnings to U.S. earnings. The lower tax rate in 1996, compared with 1995, reflects a shift in the international earnings mix from higher tax-rate countries to lower tax-rate countnes and a functional currency, Caltex's total reported foreign currency losses of $62 million for the first nine months of 1997 from its Korean and Japanese affiliates compared with foreign currency losses of $46 million for the full year 1996. After the change in functional cur rency to the U.S. dollar, Caltex reported foreign currency gains of $167 million for the full year 1997 from operations in Korea and Japan. Prior to the change in func tional currency, losses from the translation of U.S. dollar-denominated debt to local currency were offset partially by the tax benefit resulting from the deductibility of the losses for local tax purposes. CHEV BB Operating, Selling & Administrative Expenses, Excluding Special Items Millions of dollars 8000 Total expenses fell nearly $400 million in 1997. 0002738 3 UISCUSSION AND ANALYSIS OF FINANCIAL Condition and Results of Operations - Continued After the change to the U.S. dollar functional currency, translation of the U.S. dollar-denominated debt does not generate any U.S. dollar exchange losses. However, the deductibility of the local currency losses arising from the debt continues to provide tax benefits that are translated to U.S. dollar income. RESULTS BY MAJOR OPERATING AREAS Millions of dollars 1997 Exploration and Production United States $1,001 International 1,252 Total Exploration and Production 2,253 Refining, Marketing and Transportation United States International 601 298 Total Refining, Marketing and Transportation 899 Total Petroleum 3,152 Chemicals 228 Coal and Other Minerals , 48 Corporate and Other (172) Net Income S3,256 1996 $1,087 1,211 2,298 193 226 419 2,717 200 46 (356) $2,607 1995 $ 72 690 762 (104) 345 241 1,003 484 (18) (539) $ 930 SPECIAL ITEMS BY MAJOR OPERATING AREAS Millions of dollars 1997 1996 1995 Exploration and Production United States International S 29 55 Total Exploration and Production 84 Refining, Marketing and Transportation United States International (61) (69) Total Refining, Marketing and Transportation (130) Total Petroleum Chemicals Coal and Other Minerals Corporate and Other (46) 4 (2) 120 Total Special Items Included in Net Income S 76 $ (22) 69 47 (97) 59 (38) 9 (28) (2) (23) S (44) $ (480) (121) (601) (179) 62 (117) (718) (40) (65) (209) $(1,032) U.S. exploration and production earnings, excluding spe cial items, declined 12 percent from record eamings in 1996 but were up 76 percent from 1995 levels. The eamings decline in 1997, relative to 1996, was a result of lower crude oil prices, lower natural gas production and higher explo ration expenses. Eamings for 1996 more than doubled from 1995 levels due to higher crude oil and natural gas prices, which more than offset lower liquids production. Net liquids production for 1997 averaged 343,000 bar rels per day, up slightly from 341,000 barrels per day in 1996 but down 2 percent from 350,000 barrels per day in 1995. Net natural gas production in 1997 averaged about 1.85 bil lion cubic feet per day, compared with 1.88 billion cubic feet per day in 1996 and 1.87 billion cubic feet per day in 1995. The production declines since 1995 resulted from producing property sales and normal field declines, partially offset by new production. The company has several major long-term projects under way, primarily in the Gulf of Mexico, which should help mitigate the decline in its U.S. oil and gas pro duction volumes. The company's average crude oil realizations of $17.6per barrel were $1.12 lower than the $18.80 averaged for 1996 but $2.34 more than the $15.34 per barrel averaged 1995. Realizations remained steady at $15.00 to $16.00 pe barrel during 1995. In 1996, Chevron's crude oil realizatio increased steadily during the year, reaching an average of $21.93 in December, but declined in early 1997 to about $17.00 by April. Realizations fluctuated around that level u December 1997, when they dropped to $15.66 per barrel, a have continued to decline in early 1998. U.S. Exploration and Production Millions of dollars 1997 Eamings, Excluding Special Items $ 972 Asset Write-Offs and Revaluations Initial-Implementation of SFAS No. 121 (68) - Asset Dispositions 190 Environmental Remediation Provisions . Restructurings and Reorganizations (6) (60) Other (27) Total Special Items Reported Earnings 29 $1,001 1996 $1,109 (19) 17 (10) 1 (11) (22) $1,087 195 $55 ( (49- ( ( 2" (48C $ 72 The company's average natural U.S. Net Crude Oil & gas prices were $2.42 per thousand cubic feet in 1997, up 14 cents from $2.28 in 1996 and up 91 Natural Gas Liquids Production Thousands of barrels per day cents from the 1995 average of <00 $1.51. Steady demand and low inventories caused by tight sup plies buoyed prices during 1997, but warmer winter weather has softened demand early in 1998. Exploration expenses were higher in 1997 than either 1996 or 1995, due to increased exploration activity in the Gulf of Mexico as the company evaluates its many prospects. Depreciation expense increased 13 percent in 1997 com pared with 1996, primarily as a result of higher impairment write offs, but declined 44 percent from Gulf of Mexico projects arrested the decline in 1995 levels when the implementa U.S. production. tion of SFAS No. 121 first required significant asset write-offs. International exploration and production had record eamings for the second consecutive year. The strong eamings in 1997 primarily reflected higher crude oil sales volumes, which more than offset the decline in crude pnces. In 1996, higher crude oil and natural gas sales volumes and higher crude oil prices accounted for the 41 percent increase in oper ating eamings compared with 1995. International exploration and production operations, including production from equity affiliates, increased net liquids production by 4 percent, to 731,000 barrels per day in 1997. This was the eighth consecutive year of production 32 CHEV BB 0002739 increases, reflecting the company's successful strategy of growing its international operations. Kazakhstan, Nigeria and Congo were the principal sources of the increase. In 1996, net liquids production increased 8 percent over 1995 to 702,000 barrels per day. Production growth in Angola, Nigeria and Kazakhstan and new production in Congo accounted for most of the increase. Net natural gas production declined about 1 percent in 1997 to 576 million cubic feet per day compared with 1996 but was up nearly 2 percent from 1995 levels. Net natural gas production declines in 1997 occurred in Canada, Kazakhstan, the United Kingdom and Indonesia. Partially off setting these declines was initial natural gas production in Nigeria, where the Escravos Natural Gas Project began opera tion in 1997. Net natural gas production volumes in 1996 were up 3 percent from 1995 levels. International Exploration and Production Millions of dollars 1997 Earnings, Excluding Special Items $1,197 Asset Write-Offs and Revaluations - Initial Implementation of SFAS No. 121 - Asset Dispositions 50 Prior-Year Tax Adjustments 10 Restructurings and Reorganizations - UFO Inventory Losses - Other (5) Total Special Items 55 Reported Earnings $1,252 199S $1,142 117) - 91 (5) - 69 $1,211 1995 $811 - (81) - (22) (10) (1) (?) (121) $690 The company's average international liquids prices, including equity affiliates, were $17.97 per barrel in 1997 compared with $19.48 in 1996 and $16.10 in 1995. Average natural gas prices rose to $2.10 per thousand cubic feet in 1997, compared with $1.86 and $1.73 in 1996 and 1995, respectively. Exploration Expenses Millions of dollars S00 $493 Worldwide Exploration & Production Earnings, Excluding Special Items Millions of dollars U.S. Oil & Gas International Oil & Gas Minerals Evaluation of Gulf of Mexico leases increased U.S. exploration activity. United States International Higher production levels nearly offset a decline in crude oil prices. Earnings included net foreign currency gains of $77 mil lion for 1997 and losses of $27 million in 1996. These earn ings impacts primarily reflected currency rate swings of the U.S. dollar relative to the Australian dollar and the British pound in 1997 and 1996. In 1995, the loss of $16 million reflected rate swings between the U.S. dollar and the Cana dian and Nigerian currencies. SELECTED OPERATING DATA U.S. EXPLORATION AND PRODUCTION Net Crude Oil and Natural Gas Liquids Production (MBPD) Net Natural Gas Production (MMCFPD) Natural Gas Sales (MMCFPD)1 Natural Gas Liquids Sales (MBPD)1 Revenues from Net Production Crude Oil ($/Bbl) Natural Gas (S/MCF) 1997 1996 1995 343 341 350 1,849 3,389 132 1,875 3,588 187 1,868 2,815 213 $17.68 $ 2.42 $18.80 $ 2.28 $15.34 $ 1.51 INTERNATIONAL EXPLORATION AND PRODUCTION1 Net Crude Oil and Natural Gas Liquids Production (MBPD) Net Natural Gas Production (MMCFPD) Natural Gas Sales (MMCFPD) Natural Gas Liquids Sales (MBPD) Revenues from Liftings Liquids ($/Bbl) Natural Gas (S/MCF) Other Produced Volumes (MBPD)2 731 702 651 576 1,141 43 584 565 778 564 36 47 $17.97 $ 2.10 82 $19.48 $ 1.86 79 $16.10 $ 1.73 U.S. REFINING AND MARKETING Gasoline Sales (MBPD) Other Refined Products Sales (MBPD) Refinery Input (MBPD) Average Refined Products Sales Price (S/Bbl) 591 602 933 $28.93 556 566 951 $29.94 552 565 925 $26.19 INTERNATIONAL REFINING AND MARKETING1 Refined Products Sales (MBPD) Refinery Input (MBPD) 886 565 944 969 537 598 CHEMICALS SALES AND OTHER OPERATING REVENUES3 United States $3,045 International 588 Worldwide $3,633 $2,936 605 $3,541 $3,332 621 $3,953 MBPD - Thousands of barrels per day; MMCFPD Millions of cubic feet per day; Bbl - Barrel; MCF * Thousands of cubic feel, includes equity in affiliates. 2Total field production under Boscan operating service agreement in Venezuela bcgtnningjuly 1.1996. ^Millions of dollars. Includes sales to other Chevron companies. U.S. refining, marketing and transportation earnings, excluding special items, in 1997 were the highest since 1988. The significant improvement in earnings compared with 1996 and 1995 was driven by higher demand for refined products and improved sales margins, reflecting both lower crude oil costs and lower operating expenses. 1997 operating earnings CHEV BB 33 0002740 CHEVRON CORPORATION 1997 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued were more than double 1996 earnings and nearly 9 times the 1995 level. U.S. downstream results were depressed in 1996 and 1995 by competitive conditions in many of the company's markets that did not allow the full recovery of higher crude oil costs and by the increased manufactunng cost of the Cali fornia-mandated cleaner-burning gasolines. Market condi tions were especially difficult late in 1996 when crude oil prices rose to their highest level since 1991. However, refinery performance in 1996 was improved from 1995, which had extensive scheduled and unscheduled downtime. Refined products sales volumes increased 6 percent to 1.19 million barrels per day in 1997, compared with 1.12 mil lion barrels per day in 1996 and 1995. About half this increase reflected higher-value gasoline sales volumes. In 1997, average U.S. refined products sales realizations declined about $1.00, or 3 percent, to $28.93 per barrel from $29.94 in 1996 but improved from 1995 levels of $26.19, reflecting the trend in crude oil prices. U.S. Refining and Marketing Millions of dollars Earnings, Excluding Special Items Asset Write-Offs and Revaluations Asset Dispositions Environmental Remediation Provisions Restructurings and Reorganizations LIFO Inventory Gains Other Total Special Items Reported Eamings (Loss) 1997 S662 - (18) (12) (31) (61) $601 1996 $290 (48) 4 (29) (1) 2 (25) (97) $193 1995 $ 75 (112) (62) (7) 2 - (179) $(104) International refining, marketing and transportation earnings include international marine operations and equity earnings of the company's Caltex Petroleum Corporation affiliate in addition to earnings from its consolidated refining and marketing subsidiaries. Excluding special items, earnings of $367 million in 1997 more than doubled 1996 earnings of $167 million and were up 30 percent from $283 million earned in 1995. Equity earnings of Caltex were $252 million, $408 million and $294 million for 1997,1996 and 1995, respectively. Excluding special items, the company's earnings from Caltex's activities were $247 million, $127 million and $213 million, respectively, for 1997,1996 and 1995. The higher 1997 operating earnings were largely attribut able to Caltex and reflected currency gains of $177 million as Asian currencies generally weakened against the U.S. dollar. The largest currency impact was in Korea, mostly as a result of local net deferred tax benefits on currency losses from U.S. dollar-denominated liabilities. Partially offsetting Caltexis cur rency gains were inventory valuation losses associated with the recent decline in crude oil prices combined with higher provi sions for the noncollectibility of receivables in Asia, together totaling about $50 million. Chevrons share of Caltex earnings in 1997 also included $5 million of favorable LIFO adjust ments. Caltex experienced foreign currency losses of $24 mil lion in 1996 and gains of $26 million m 1995. Also in 1996, Caltex earnings benefited $2 million from favorable adjust ments to the carrying value of its petroleum inventories to reflect market values and included special gains of $279 mil- 34 lion related to the sale of its interest m two Japanese refinenes and $2 million of favorable LIFO adjustments. Caltex earnings in 1995 benefited $13 million in inventory adjustments and included net special gams of $81 million, pnmanly related to a land sale by a Caltex affiliate in Japan. Results in all three years reflect generally weak industryconditions that have held down product prices and sales mar gins in the company's major areas of operations. Chevron's international refined products sales volumes declined 6 percent in 1997 to 886,000 barrels per day from 944,000 barrels per day in 1996 and 969,000 barrels per dayin 1995. The primary reason for the decline in 1997 and 1996 volumes was Caltex's sale of its interest in two Japanese refineries in early 1996. Total Caltex refined products sales volumes, excluding transactions with Chevron, decreased 4 percent to 1.15 million barrels per day in 1997, compared with 1.20 million barrels per day in 1996 and 1.33 million barrels per day in 1995. Overall, international refining and marketing foreign cur rency effects resulted in gains of $169 million and $19 million in 1997 and 1995, respectively, and losses of $17 million m 1996. International Refining and Marketing Millions of dollars Eamings, Excluding Special Items Asset Write-Offs and Revaluations Asset Dispositions Environmental Remediation Provisions Restructurings and Reorganizations UFO Inventory Gains (Losses) Other Total Special Items Reported Earnings 1997 $367 - (72) 6 (3) (69) $298 1996 $167 (200) 279 (15) 1 (6) - 59 $226 1995 $283 (1) - - (17) - 80 62 $345 U.S. Sales of Refined Products vs. Refinery Runs Thousands of barrels per day 1500 Worldwide Refining & Marketing Earnings, Excluding Special Items Millions of dollars " 1200 $1,029 93 94 95 96 97 93 94 95 96 97 U.S. Refined Products Sales * U.S. Refinery Runs United States * International Refined products sales Refining and marketing climbed 6 percent in 1997. earnings more than doubled in 1997, leading the way to _ Chevron's record year. CHEVBB J002741 Chemicals earnings, excluding special items, were $224 million in 1997, about flat with $228 million in 1996 but down 57 percent from record 1995 results of $524 million. Earnings for 1997 benefited from reduced depreciation expense, as a result of a reassessment and extension of the useful lives of certain assets. This benefit was offset by lower industry prices, higher feedstock and fuel costs, and expenses related to maintenance and expansion activities during the year. Industry overcapacity depressed margins for styrene, paraxylene and polystyrene in 1997, but margins improved for benzene and ethylene. Earnings for 1996 benefited from a nonrecurring receipt of insurance proceeds. A cyclical down turn in the chemicals industry beginning late in 1995 caused earnings to fall substantially in 1996 and 1997. Although sales volumes remained strong for most of 1996 and 1997, lower prices and higher feedstock and fuel costs resulted in lower margins for most of the company's major chemical products compared with 1995. Chemicals Millions of dollars Earnings, Excluding Special Items Asset Write-Offs and Revaluations Initial Implementation of SFAS No. 121 Asset Dispositions Environmental Remediation Provisions Restructurings and Reorganizations UFO Inventory (Losses) Gains Other Total Special Items Reported Earnings ' 1997 $224 (10) 33 (9) - (1) (9) 4 $228 1996 $228 (12) (16) (28) $200 1995 $524 (14) (13) 9 (20) (3) 1 - (40) $484 Coal and other minerals earnings, excluding special items, were about flat at $50 million, compared with $48 mil lion in 1996 and $47 million in 1995. Higher sales volumes and increases in affiliate income in 1997 were offset partially by higher operating costs compared with 1996. Coal earnings were depressed in 1996 and 1995 from an abundance of lowcost hydroelectric power in the western United States, result ing in low coal demand and low prices in both years. Sales in 1997 of approximately 19.6 million tons were up 23 percent from 16 million tons in 1996 and up 15 percent from 17 mil lion tons in 1995. The increase in sales is primarily due to increased demand and low customer inventories. Coal and Other Minerals Millions of dollars Earnings, Excluding Special Items Initial Implementation of SFAS No. 121 Restructurings and Reorganizations Other Total Special Items Reported Earnings _ 1997 $ 50 - - (2) (2) $ 48 1996 $ 48 - (2) - (2) $ 46 1995 $ 47 (63) (2) (65) S (18) Corporate and other activities include interest expense, interest income on cash and marketable securities, real estate and insurance operations, and corporate center costs. Corpo rate and other net operating charges, excluding special items, declined $41 million to $292 million in 1997 as a result of lower interest expense on reduced debt levels combined with higher interest income and lower insurance costs. In the two preceding years, corporate and other net operating charges were about flat at $333 million in 1996 and $330 million in 1995. Corporate and Other Millions of dollars 1997 Charges, Excluding Special Items $(292) Asset Write-Offs and Revaluations Initial Implementation of SFAS No. 121 (8) - Environmental Remediation Provisions Prior-Year Tax Adjustments (8) 142 Restructurings and Reorganizations - Other Total Special Items (6) 120 Reported Charges $(172) 1996 1995 S(333) f $(330) (41) (170) - (12) 52 (8) (26) (23) $(356) - (11) (16) (209) $(539) LIQUIDITY AND CAPITAL RESOURCES. Cash, cash equivalents and marketable securities totaled $1,670 billion at year-end 1997, up slightly from $1,637 billion at year-end 1996. Cash provided by operating activities in 1997 was $4,583 billion, compared with $5,770 billion in 1996 and $4,057 billion in 1995. Despite higher 1997 operating earnings, cash from oper ations declined from 1996 due to lower distributions from equity affiliates and increased working capital and other oper ating requirements. Distributions from the company's Caltex affiliate were high in 1996 because of its sale of refinery inter ests. In 1997, cash from operations and proceeds from asset sales were sufficient to fund the company's capital expendi tures, dividend payments to stockholders and stock repur chases and also enabled the company to reduce its debt level. In January 1998, the company announced an increase in the quarterly dividend on its common stock by 3 cents a share, or 5 percent, to 61 cents a share raising Chevron's annualized dividend rate to $2.44 a share. The company's debt and capital lease obligations totaled $6,068 billion at December 31, 1997', down $626 million from $6,694 billion at year-end 1996. The company's shon-term Cash Provided by Operating Activities Millions of dollars debt, consisting primarily of 6000 commercial paper and current portion of long-term debt, totaled $4,362 billion at Decem ber 31,1997. Of the total shon- term debt, $2,725 billion was reclassified to long-term debt at year-end 1997, an increase of $925 million from year-end 1996, reflecting an increase in the company's committed credit facilities with termination dates beyond one year. Settlement of these obligations is not expected to require the use of working capital in 1998 because the com Higher earnings were more than offset by lower dividends pany has the intent and the abil ity, as evidenced by committed from affiliates, increased work ing capital and other demands. credit arrangements, to refinance them on a long-term basis. The CHEV BB 0002742 35 CHEVRON CORPORATION 1997 ANNUAL REPORT Management's Discussion and Analysis of Financial Condition and Results of Operations - Continued Total Interest Expense/ Total Debt at Year-End company's practice has been to continually refinance its com Millions of dollars mercial paper, maintaining levels 10000 800 it believes to be appropriate. Significant debt transac tions in 1997 included the 8000 600 scheduled first quarter maturity of $138 million of Swiss franc- 6000 $6,068 denominated 4.625 percent 400 debt and the third quarter early redemption of $142 million of 4000 9.75 percent debentures origi nally due in 2017. The Em 200 8000 ployee Stock Ownership Plan also retired in January 1997, as scheduled, $50 million of 7.28 93 94 95 96 97 Total Interest Expense (Right Scale) Total Debt (Left Scale) Strong cash flow allowed the company to reduce debt more percent debt related to the Em ployee Stock Ownership Plan. On December 31,1997, Chevron had $4,050 billion in committed credit facilities with various major banks. These than J600 million. facilities support commercial paper borrowing and also can be used for general credit requirements. No borrowings were outstanding under these facilities during the year or at year- end 1997. In addition. Chevron and one of its subsidiaries each have existing "shelf' registrations on file with the Securi ties and Exchange Commission that together would permit registered offerings of up to $1.3 billion of debt securities. The company's future debt level is dependent primarily on its capital spending program and its business outlook. The company currently expects its debt level to increase during 1998 and believes it has substantial borrowing capacity to meet unanticipated cash requirements. The company's senior debt is rated AA by Standard & Poor's Corporation and Aa2 by Moody's Investors Service. Chevron's U.S. commercial paper is rated A-1+ by Standard & Poor's and Prime-1 by Moody's, and Chevron's Canadian com mercial paper is rated R-l (middle) by Dominion Bond Rating Service. Moody's counterparty rating for Chevron is also Aa2. All these ratings denote high-quality, investment-grade securities. In December 1997, Chevron announced that its Board of Directors approved the repurchase of up to $2 billion of its outstanding common stock. The company plans to use the repurchased stock for its employee stock option programs. At year-end 1997, the company had purchased 1,199,300 shares at an average cost of $76.49 per share. FINANCIAL RATIOS. The current ratio is the ratio of current assets to current liabilities at year-end. Two items negatively affect Chevron's current ratio neither of which, in the com pany's opinion, affect its liquidity. Current assets in all years include inventones valued on a LIFO basis, which at year-end 1997 were lower than current costs by $1.1 billion. Also, the company continually refinances its commercial paper. At yearend 1997, approximately $600 million of commercial paper, after excluding $2,725 billion reclassified to long-term debt, 36 is classified as a current liability although it is likely to remain outstanding indefinitely. Financial Ratios Current Ratio Interest Coverage Ratio Total Debt/Total Debt Plus Equity 1997 1.0 14.3 25.8% 1996 0.9 10.9 30.0% 1995 0.8 4.1 36.7% The interest coverage ratio is defined as income before income tax expense, plus interest and debt expense and amortization of capitalized interest, divided by before-tax interest costs. Chevron's interest coverage ratio improved sig nificantly in 1997 due to higher before-tax income and lower interest expense. The company's debt ratio (total debt to total debt plus equity) decreased in 1997, as total debt decreased and stockholders' equity increased year to year, due to strong cash flow and net income. CAPITAL AND EXPLORATORY EXPENDITURES. Worldwide capi tal and exploratory expenditures for 1997 totaled $5,541 bil lion, including the company's equity share of affiliates' expenditures. Capital and exploratory expenditures were $4,840 billion in 1996 and $4,800 billion in 1995. Expendi tures for exploration and production accounted for 64 per cent of total outlays in 1997, compared with 62 percent in 1996 and 57 percent in 1995. International exploration and production spending was 53 percent of worldwide explora tion and production expenditures in 1997, down from 61 per cent in 1996 and 68 percent in 1995, reflecting the company's efforts to slow the decline in its U.S. production while continu ing its focus on growth of international exploration and produc tion activities. The company projects 1998 capital and exploratory expenditures at $6.3 billion, including Chevron's share of spending by affiliates. The 1998 program provides $4.0 billion for exploration and production investments, of which about 63 percent is for international projects. Capital Employed Millions of dollars Several long-term development projects in the Gulf of Mexico 25000 $22,958 account for a major portion of the projected $1.5 billion to be spent in U.S. exploration and production. Refining, marketing and trans portation expenditures are esti mated at about $1.1 billion, with $600 million of that planned for projects in the United States, a majority of which will be spent for marketing projects. Most of the international downstream capital program will be focused in Asia- Pacific countries, where the com Average Debt pany's Caltex affiliate is upgrading Average Stockholders' Equity its retail marketing system. The Chevron's debt to debt- company plans to invest $830 mil plus-equity ratio declined lion in the worldwide chemicals to 26 percent in 1997. business. CHEVBB 0002743 Capital and Exploratory Expenditures Millions of dollars Exploration and Production Refining, Marketing and Transportation Chemicals Coal and Other Minerals All Other Total Total, Excluding Equity Affiliates U.S. $1,659 520 470 65 75 $2,789 $2,487 1997 Inter- national Total $1,903 602 194 53 - $2,752 $1,880 $3,562 1,122 664 118 75 $5,541 $4,367 1996 InterU.S. national Total $1,168 429 377 31 70 $2,075 $2,037 $ 1,854 781 120 10 - $2,765 $ 1,820 $3,022 1,210 497 41 70 $4,840 $3,857 1995 InterU.S. national Total $ 879 892 172 40 110 $ 2,093 $ 2,080 $1,835 839 32 1 - $2,707 $1,808 $2,714 1,731 204 41 110 $4,800 $3,888 FORWARD-IOOKING STATEMENTS This annual report contains forward-looking statements relating to Chevron's operations that are based on management's current expectations, estimates and projections about the petroleum and chemicals industries. Words such as "expects," "intends," "plans," "projects," "believes," "estimates" and similar expressions are used to identify such forward-looking state ments. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecast in such forward-looking statements. Among the factors that could cause actual results to differ materially are crude oil and natural gas prices; refining margins and marketing margins; chemicals prices and competitive conditions affecting supply and demand for the company's aromat ics, olefins and additives products; inability of the company's joint venture partners to fund their share of operations and development activities; potential failure to achieve expected production from existing and future oil and gas development projects; potential disruption or interruption of the company's production or manufacturing facilities due to accidents or political events; potential liability for remedial actions under existing or future environmental regulations; and potential liabil ity resulting from pending or future litigation. In addition, such statements could be affected by general domestic and interna tional economic and political conditions. Report of Management TO THE STOCKHOLDERS OF CHEVRON CORPORATION Management of Chevron is responsible for preparing the accompanying financial statements and for assuring their integrity and objectivity. The statements were prepared in accordance with generally accepted accounting principles and fairly represent the transactions and financial position of the company. The financial statements include amounts that are based on management's best estimates and judgments. The company's statements have been audited by Price Waterhouse LLP, independent accountants, selected by the Audit Committee and approved by the stockholders. Management has made available to Price Waterhouse LLP all the company's finan cial records and related data, as well as the minutes of stockholders' and directors' meetings. Management of the company has established and maintains a system of internal accounting controls that is designed to pro vide reasonable assurance that assets are safeguarded, transactions are properly recorded and executed in accordance with man agement's authorization, and the books and records accurately reflect the disposition of assets. The system of internal controls includes appropnate division of responsibility. The company maintains an internal audit department that conducts an extensive program of internal audits and independently assesses the effectiveness of the internal controls. The Audit Committee is composed of directors who are not officers or employees of the company. It meets regularly with members of management, the internal auditors and the independent accountants to discuss the adequacy of the company's inter nal controls, its financial statements and the nature, extent and results of the audit effort. Both the internal auditors and the inde pendent accountants have free and direct access to the Audit Committee without the presence of management. Kenneth T. Derr Chairman of the Board and Chief Executive Officer February 20,1998 Martin R. Klitten Vice President and Chief Financial Officer Stephen J. Crowe Comptroller CHEV BB 0002744 37 Consolidated Statement of Income Millions of dollars, except per-share amounts REVENUES Sales and other operating revenues* Income from equity affiliates Other income TOTAL REVENUES COSTS AND OTHER DEDUCTIONS Purchased crude oil and products Operating expenses Selling, general and administrative expenses Exploration expenses Depreciation, depletion and amortization Taxes other than on income* Interest and debt expense TOTAL COSTS AND OTHER DEDUCTIONS INCOME BEFORE INCOME TAX EXPENSE INCOME TAX EXPENSE NET INCOME NET INCOME PER SHARE OF COMMON STOCK - BASIC -DILUTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING `Includes consumer excise taxes. Set accompanying notes to consolidatedfinancial statements. 1997 $40,583 * 688 679 41,950 20,223 5,280 * 1,533 493 2,300 6,307 312 36,448 5,502 2,246 $ 3,256 $4.97 $4.95 654,990,921 S5,574 Year ended December 31 1996 1995 $42,782 767 344 43,893 22,826 6,007 1,377 455 2,216 5,908 364 39,153 4,740 2,133 $ 2,607 $3.99 $3.98 652,769,250 $5,202 $36,310 553 219 37,082 18,033 5,974 1,384 372 3,381 5,748 401 35,293 1,789 859 $ 930 $1.43 $1.43 652,083,804 $4,988 Report of Independent Accountants TO THE STOCKHOLDERS AND THE BOARD OF DIRECTORS OF CHEVRON CORPORATION In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of income, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Chevron Corporation and its subsidiaries at December 31,1997 and 1996, and the results of their operations.and their cash flows for each of the three years in the period ended December 31,1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material ' misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 3 to the consolidated financial statements, effective October 1, 1995, the company changed its method of accounting for the impairment of long-lived assets to comply with the provisions of Statement of Financial Accounting Stan dards No. 121. i/lasL San Francisco, California February 20, 1998 CHEVbb 3002745 Consolidated Balance Sheet Millions of dollars ASSETS Cash and cash equivalents Marketable securities Accounts and notes receivable (less allowance: 1997 - $32; 1996 - $71) Inventories: Crude oil and petroleum products Chemicals Materials, supplies and other Prepaid expenses and other current assets TOTAL CURRENT ASSETS Long-term receivables Investments and advances Properties, plant and equipment, at cost Less: accumulated depreciation, depletion and amortization Deferred charges and other assets TOTAL ASSETS 1997 At December 31 1996 $ 1,015 655 3,374 539 547 292 1,378 584 7,006 471 4,496 49,233 26,562 22,671 829 $35,473 $ 892 745 4,035 669 507 255 1,431 839 7,942 261 4,463 46,936 25,440 21,496 692 $34,854 LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt Accounts payable Accrued liabilities Federal and other taxes on income . Other taxes payable TOTAL CURRENT LIABILITIES Long-term debt Capital lease obligations Deferred credits and other noncurrent obligations Noncurrent deferred income taxes Reserves for employee benefit plans TOTAL LIABILITIES Preferred stock (authorized 100,000,000 shares, $1.00 par value, none issued) Common stock (authorized 1,000,000,000 shares, $1.50 par value, 712,487,068 shares issued) Capital in excess of par value Deferred compensation Currency translation adjustment and other Retained earnings Treasury stock, at cost (1997 - 56,555,871 shares; 1996 - 59,401,015 shares) TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY S accompanying nous to consolidatedfinancial statements. $ 1,637 2,735 1,450732 392 6,946 4,139 292 1,745 3,215 1,664 18,001 - 1,069 2,022 (750) (77) 17,185 (1,977) 17,472 $35,473 CHEV BB 0002746 $, 2,706 3,502 1,420 745 534 8,907 3,650 338 1,858 2,851 1,627 19,231 - 1,069 1,874 (800) 96 15,408 (2,024) 15,623 $34,854 39 CONSOLIDATED STATEMENT OF CASH FLOWS Millions of dollars 1997 OPERATING ACTIVITIES Net income $3,256 Adjustments Depredation, depletion and amortization 2,300 Dry hole expense related to prior years' expenditures 31 Distributions (less than) greater than income from equity affiliates (353) Net before-tax (gains) losses on asset retirements and sales (344) Net foreign exchange (gains) losses (69) Deferred income tax provision 622 Net (increase) decrease in operating working capital1 (288) Other (572) NET CASH PROVIDED BY OPERATING ACTIVITIES2 4,583 INVESTING ACTIVITIES Capital expenditures Proceeds from asset sales Net sales of marketable securities3 NET CASH USED FOR INVESTING ACTIVITIES (3,899) 1,235 101 (2,563) FINANCING ACTIVITIES Net repayments of short-term obligations Proceeds from issuance of long-term debt Repayments of long-term debt and other finanring obligations Cash dividends paid Net sales of treasury shares NET CASH USED FOR FINANCING ACTIVITIES EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS NET CHANGE IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR CASH AND CASH EQUIVALENTS AT YEAR-END Certain amounts werr reclassified to conform wuh the 1997 presentation. See accompanying notes to consolidatedfinancial statements. (163) 26 (421) (1,493) 173 (1,878) (19) 123 892 $1,015 1The "Net (increase) decrease in operating working capital' is composed of the/ollowmg: Decrease (increase) in accounts and notes receivable (Increase) decrease in inventories Decrease (increase) in prepaid expenses and other current assets (Decrease) increase in accounts payable and accrued liabilities (Decrease) increase in income and other taxes payable Net (increase) decrease in operating working capital S 439 (W 59 (685) (90) S (288) 2mNet cash provided by operating activities* includes thefollowing cash paymentsfor interest and income taxes: Interest paid on debt (net of capitalized interest) Income taxes paid S 318 % 1,7OS 2mNct sales of marketable securities* consists of thefollowing gross amounts: Marketable securities purchased Marketable securities sold Net sales of marketable securities ------------------------------------ CHEV BB *0 0002747 -- S (2,724) 2,825 S 101 Year ended December 31 1996* 1995* $2,607 2,216 55 83 207 (10) 359 641 (388) 5,770 $ 930 3,381 19 (129) 164 47 (258) 40 (137) 4,057 (3,424) 778 44 (2,602) (3,529) 581 144 (2,804) (1,179) 95 (476) (1,358) 23 (2,895) (2) 271 621 $ 892 (227) 536 (103) (1,255) 14 (1,035) (10) 208 413 $ 621 5 30 60 IS 369 167 J 641 5 361 5 1,595 SO,443) 3.487 J 44 I (62) (162) (148) 428 (16) J 40 J 373 S 1.176 5(2,759) 2,903 $ 144 Consolidated Statement of Stockholders' Equity Number of shares Common Stock Issued Common Stock in Treasury Common Stock Capital in Excess of Par Value Deferred Com pensation Currency Translation Adjustment and Other Millions of dollars Retained Treasury Earnings Stock BALANCE AT JANUARY 1, 1995 712,487,068 Net income Cash dividends - $1,925 per share Tax benefit from dividends paid on unallocated ESOP shares Market value adjustments on investments Foreign currency translation adjustment Pension plan minimum liability Reduction of ESOP debt Purchase of treasury shares Reissuance of treasury shares (60,736,435) _ _ _ (83,028) 659,406 $1,069 - * - BALANCE AT DECEMBER 31, 1995 712,487,068 Net income Cash dividends - $2.08 per share Tax benefit from dividends paid on unallocated ESOP shares Market value adjustments on investments Foreign currency translation adjustment Pension plan ,, ..minimum liability Reduction of ESOP debt Purchase of treasury shares Reissuance of treasury shares (60,160,057) - _ _ _ (69,278) 828,320 $1,069 - . - - BALANCE AT DECEMBER 31,1996 712,487,068 Net income Cash dividends - $2.28 per share Tax benefit from dividends paid on unallocated ESOP shares Market value adjustments on investments Foreign currency translation adjustment Pension plan minimum liability Reduction of ESOP debt Share repurchase program Other purchases of treasury shares Reissuance of treasury shares (59,401,015) - _ (1,199,300) (55,722) 4,100,166 $1,069 - _ - BALANCE AT DECEMBER 31, 1997 712,487,068 (56,555,871) $1,069 $1,858 - _ _ 5 $1,863 - 11 $1,874 . w - 148 $2,022 $(900) - _ -- 50 - $(850) _ 50 - $(800) - _ 50 - $(750) See accompanying notes to consolidatcdfinancial statements, CHEV BB 0002748 $175 - $14,457 $(2,063) 930 - (1,255) 23 (28) 4 - 14 * _ -- (4) - 20 $174 - $14,146 2,607 $(2,047) - (1,358) (20) (54) (4) - 13 * C-y',LV. -* _ .*A$. ,*A?*k*&vV - - . (4) - , 27 $ 96 - $15,408 $(2,024) 3,256 (1,493) , X 14 (4) (173) 4--- - , --- _ - - (92) (3) 142 $(77) $17,185 $(1,977) 41 Notes to Consolidated Financial Statements Millions of dollars, except per-share amounts NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Chevron Corporation is an international company that, through its subsidiaries and affiliates, engages in fully inte grated petroleum operations, chemical operations and coal mining in the United States and approximately 90 other countries. Petroleum operations consist of exploring for, developing and producing crude oil and natural gas; trans porting crude oil, natural gas and products by pipelines, marine vessels and motor equipment; refining crude oil into finished petroleum products; and marketing crude oil, natural gas and refined petroleum products. Chemicals operations include the manufacture and marketing of a wide range of chemicals for industrial uses. In preparing its consolidated financial statements, the company follows accounting policies that are in accordance with generally accepted accounting principles in the United States. This requires the use of estimates and assumptions that affect the assets and liabilities and the revenues and expenses reported in the financial statements, as well as amounts included in the notes thereto, including discussion and disclosure of contingent liabilities. While the company uses its best esti mates and judgments, actual results could differ from these estimates as future confirming events occur. The nature of the company's operations and the many countries in which it operates subject it to changing economic, regulatory and political conditions. Also, the company imports crude oil for its U.S. refining operations. The company does not believe it is vulnerable to the risk of a near-term severe impact as a result of any concentration of its activities. Subsidiary and Affiliated Companies The consolidated financial statements include the accounts of subsidiary com panies more than 50 percent owned. Investments in and advances to affiliates in which the company has a substantial ownership interest of approximately 20 percent to 50 percent, or for which the company exercises significant influence but not control over policy decisions, are accounted for by the equity method. Under this accounting, remaining unamor tized cost is increased or decreased by the company's share of earnings or losses after dividends. Oil and Gas Accounting The successful efforts method of accounting is used for oil and gas exploration and production activities. Derivatives Gains and losses on hedges of existing assets or liabilities are included in the carrying amounts of those assets or liabilities and are ultimately recognized in income as part of those carrying amounts. Gains and losses related to qualify ing hedges of firm commitments or anticipated transactions also are deferred and are recognized in income or as adjust ments of carrying amounts when the underlying hedged transaction occurs. Cash flows associated with these deriva tives are reported with the underlying hedged transaction's cash flows. If, subsequent to being hedged, underlying trans actions are no longer likely to occur, the related derivatives gains and losses are recognized currently in income. Gains and losses on derivatives contracts that do not qualify as hedges are recognized currently in "Other income." 42 CHEV BB -)002749 Short-Term Investments All short-term investments are classified as available for sale and are in highly liquid debt secu rities. Those investments that are part of the company's cash management portfolio with original matunties of three months or less are reported as cash equivalents. The balance of the short-ten?, investments is reported as "Marketable secunties.'' Inventories Crude oil, petroleum products and chemicals are stated at cost, using a Last-In, First-Out (LIFO) method. In the aggregate, these costs are below market. Materials, sup plies and other inventories generally are stated at average cost. Properties, Plant and Equipment All costs for development wells, related plant and equipment (including carbon dioxide and certain other injected materials used in enhanced recov ery projects), and mineral interests in oil and gas properties are capitalized. Costs of exploratory wells are capitalized pending determination of whether the wells found proved reserves. Costs of wells that are assigned proved reserves remain capitalized. All other exploratory wells and costs are expensed. Beginning in 1995, long-lived assets, including proved oil and gas properties, are assessed for possible impairment in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 121. Under this standard, the occurrence of certain events, such as a downward revision to proved oil and gas reserves, may trigger a review of affected assets for possible impairment. For proved oil and gas proper ties, the company would typically perform the review on an individual field basis. Impairment amounts are recorded as incremental depreciation expense in the period in which the specific event occurred. Depreciation and depletion (including provisions for future abandonment and restoration costs) of all capitalized costs of proved oil and gas producing properties, except min eral interests, are expensed using the unit-of-production method by individual fields as the proved developed reserves are produced. Depletion expenses for capitalized costs of proved mineral interests are recognized using the unit-of-production method by individual fields as the related proved * reserves are produced. Periodic valuation provisions for impairment of capitalized costs of unproved mineral interests are expensed. Depreciation and depletion expenses for coal are deter mined using the unit-of-production method as the proved reserves are produced. The capitalized costs of all other plant and equipment are depreciated or amortized over estimated useful lives. In general, the declining-balance method is used to depreciate plant and equipment in the United States; the straight-line method generally is used to depreciate interna tional plant and equipment and to amortize all capitalized leased assets. Gains or losses are not recognized for normal retirements of properties, plant and equipment subject to composite group amortization or depreciation. Gains or losses from abnormal retirements or sales are included in income. Expenditures for maintenance, repairs and minor renewals to maintain facilities in operating condition are expensed. Major replacements and renewals are capitalized. NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Environmental Expenditures Environmental expenditures that relate to current ongoing operations or to conditions caused by past operations are expensed. Expenditures that create future benefits or contribute to future revenue generadon are capitalized. Liabilities related to future remediadon costs are recorded when environmental assessments and/or cleanups are proba ble and the costs can be reasonably estimated. Other than for assessments, the timing and magnitude of these accruals are generally based on the company's commitment to a formal plan of action, such as an approved remediation plan or the sale or disposal of an asset. For the company's U.S. and Cana dian marketing facilities, the accrual is based on the probabil ity that a future remediation commitment will be required. For oil and gas and coal producing properties, a provision is made through depreciation expense for anticipated abandonment and restoration costs at the end of the property's useful life. For Superfund sites, the company records a liability for its share of costs when it has been named as a Potentially Responsible Party (PRP) and when an assessment or cleanup plan has been developed. This liability includes the company's own portion of the costs and also the company's portion of amounts for other PRPs when it is probable that they will not be able to pay their share of die cleanup obligation. The company records the gross amount of its liability based on its best estimate of future costs using currently avail able technology and applying current regulations as well as the company's own internal environmental policies. Future amounts are not discounted. Recoveries or reimbursements are recorded as an asset when receipt is reasonably assured. Currency Translation The U.S. dollar is the functional cur rency for the company's consolidated operations as well as for substantially all operations of its equity method companies. For those operations, all gains or losses from currency trans actions are currendy included in income. The cumulative translation effects for the few equity affiliates using functional currencies other than the U.S. dollar are included in the cur rency translation adjustment in stockholders' equity. Taxes Income taxes are accrued for retained earnings of international subsidiaries and corporate joint ventures intended to be remitted. Income taxes are not accrued for unremitted earnings of international operations that have been, or are intended to be, reinvested indefinitely. Stock Compensation The company applies Accounting Principles Board (APB) Opinion No. 25 and related interpre tations in accounting for stock options and presents in Note 18 pro forma net income and earnings per share data as if the accounting prescribed by SFAS No. 123 had been applied. NOTE 2. SPECIAL ITEMS AND OTHER FINANCIAL INFORMATION Net income is affected by transactions that are unrelated to or are not necessarily representative of the company's ongoing operations for the periods presented. These trans actions, defined by management and designated "special items," can obscure the underlying results of operations for a year as well as affect comparability of results between years. Listed below are categories of special items and their net increase (decrease) to net income, after related tax effects: Year ended December Si 1997 1996 1995 Asset write-offs and revaluations Asset impairments U.K. refining and marketing S (68) $ (68) $ - (200) - Real estate development assets - New accounting standard (SFAS No. 121) Adjustment of fixed assets records - Refining assets - Other (18) (86) Asset dispositions, net Oil and gas properties 240 U.K. refining and marketing exit (72) Sale of chemicals affiliate 33 Caltex sale of two refineries - NGC merger - Other (18) 183 Environmental remediation provisions (35) Prior-year tax adjustments 152 Restructurings and reorganizations (29) - (40) (337) 80 - 279 32 - 391 (54) 52 (168) (659) (94) (38) (4) (963) 6 - - - 1 7 (90) (22) NGC Work-force reductions Caltex UFO inventory gains (losses) Other, net Performance stock options Litigation and regulatory issues Federal lease cost refund Caltex gain related to land sale Miscellaneous, net Total special items, after tax (54) (6) (60) 5 (14) (14) (4) (38) (12) (50) 2 (66) (24) 7 (83) $ 76 (90) 12 (78) $ (44) - (23) 27 86 (6) 84 $(1,032) Other financial information is as follows: Year ended December 31 1997 1996 1995 Total financing interest and debt costs Less: capitalized interest Interest and debt expense Research and development expenses Foreign currency gains (losses)* $411 99 312 179 $246 $472 108 364 182 $(26) $543 142 401 185 $(15) *lncludes S177, $(28) and $25 in 1997,1996 and 1995, respfcuvety, jor the compony's share oj affiliates'foreign currency gains Gosses). The excess of current cost (based on average acquisition costs for the year) over the carrying value of inventories for which the LIFO method is used was $1,089, $1,122 and $917 at December 31,1997, 1996 and 1995, respectively. NOTE 3. ADOPTION OF STATEMENT OF FINANCIAL ACCOUNT ING STANDARDS (SFAS) NO. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" Effective October 1, 1995, the CHEV BB *0002750 4 CHEYRQH CORPORAUQH 1997 ANNUAL REPORT Notes to Consolidated Financial Statements Millions 0/ dollars, except per-share amounts company and its affiliates adopted SFAS No. 121 issued by the Financial Accounting Standards Board. The adoption of this standard required noncash charges to 1995 net income amount ing to $659, or $1.01 per share, after related income tax benefits of $358, and was mostly related to impairment write-downs of U.S. oil and gas producing properties. NOTE 4. INFORMATION RELATING TO THE CONSOLIDATED STATEMENT OF CASH FLOWS The Consolidated Statement of Cash Flows excludes the following noncash transactions: During 1997, the company's Venice, Louisiana, natural gas facilities were contributed to a partnership with NGC Corporation. An increase in "Investments and advances" from this merger is considered a noncash transaction and primarily resulted from the contribution of properties, plant and equipment. During 1996, the company merged substantially all of its natural gas liquids and natural gas marketing businesses with NGC Corporation. The company received cash, a note and shares of NGC Corporation common stock and participating preferred stock in exchange for its contribution of net assets to NGC. Only the cash received is included in the Consoli dated Statement of Cash Flows as "Proceeds from asset sales." Capital lease arrangements of $282 in 1995 were recorded as additions to "Properties, plant and equipment, at cost" and "Capital lease obligations." There have been other noncash transactions that have occurred during the years presented. These include the acqui sition of long-term debt in exchange for the termination of a capital lease obligation; the reissuance of treasury shares for management and employee compensation plans; and changes in assets, liabilities and stockholders' equity resulting from the accounting for the company's ESOP, minimum pension liability and market value adjustments on investments. The amounts for these transactions are not material in the aggre gate in relation to the company's financial position. The major components of "Capital expenditures," and the reconciliation of this amount to the capital and explora tory expenditures, excluding equity in affiliates, presented in "Management's Discussion and Analysis of Financial Condi tion and Results of Operations," are presented below: Year ended December 31 1997 1996 1995 Additions to properties, plant and equipment* $3,840 Additions to investments 153 Payments for other liabilities and assets, net (94) Capital expenditures 3,899 Expensed exploration expenditures 462 Payments of long-term debt and other financing obligations 6 Capital and exploratory expenditures, excluding equity affiliates $4,367 $3,250 195 (21) 3,424 400 33 $3,857 $3,611 44 (126) 3,529 354 5 $3,888 `Excludes noncash capital lease additions of J282 in 1995. Certain amounts of cash flows in 1996 and 1995 have been reclassified to conform to the 1997 presentation. CHEV BB *4 0002751 NOTE 5. STOCKHOLDERS' EQUITY Retained earnings at December 31,1997 and 1996, include $2,272 and $2,357, respectively, for the company's share of undistributed eammgs of equity affiliates. In 1988, the company declared a dividend distnbunon of one Right for each outstanding share of common stock. The Rights will be exercisable, unless redeemed earlier by the company, if a person or group acquires, or obtains the right to acquire, 10 percent or more of the outstanding shares of com mon stock or commences a tender or exchange offer that would result in acquiring 10 percent or more of the outstand ing shares of common stock, either event occumng without the prior consent of the company. Each Right entitles its holder to purchase stock having a value equal to two times the exercise price of the Right. The person or group who had acquired 10 percent or more of the outstanding shares of common stock without the prior consent of the company would not be entitled to this purchase opportunity. The Rights will expire in November 1998, or they may be redeemed by the company at 5 cents per share pnor to that date. The Rights do not have voting or dividend rights and, until they become exercisable, have no dilutive effect on the earnings of the company. Twenty million shares of the com pany's preferred stock have been designated Series A participating preferred stock and reserved for issuance upon exercise of the Rights. No .event during 1997 made the Rights exercisable. In December 1997, the company announced a repur chase program for up to $2 billion of the company!; common stock. At December 31, 1997, the company had repurchased 1,199,300 shares at a cost of $92. NOTE 6. FINANCIAL AND DERIVATIVE INSTRUMENTS Off-Balance-Sheet Risk The company utilizes a variety of derivative instruments, both financial and commodity-based, as hedges to manage a small portion of its exposure to price volatility stemming from its integrated petroleum activities. Relatively straightforward and involving little complexity, the derivative instruments used consist mainly of futures con tracts traded on the New York Mercantile Exchange and the International Petroleum Exchange and of natural gas swap contracts entered into principally with major financial institu tions. The futures contracts hedge anticipated crude oil pur chases and sales and product sales, generally forecast to occur within a 60- to 90-day period. Natural gas swaps are used pri marily to hedge firmly committed sales, and the terms of the swap contracts held at year-end 1997 have an average remain ing maturity of 51 months. Gains and losses on these deriva tive instruments offset and are recognized concurrently with gains and losses from the underlying commodities. In addition, the company in 1997 and 1996 entered into managed programs using swaps and options to take advantage of perceived opportunities for favorable price movements in natural gas. The results of these programs are reflected cur rently in income and were not matenal in 1997 or 1996. The company enters into forward exchange contracts, generally with terms of 90 days or less, as a hedge against NOTE 6. FINANCIAL AND DERIVATIVE INSTRUMENTS - Continued some of its foreign currency exposures, primarily anticipated purchase transactions forecast to occur within 90 days. 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, based on the difference between fixed-rate and floating-Tate interest amounts calculated by reference to agreed notional principal amounts, are made either semiannually or annually, and are recorded monthly as "Interest and debt expense." At Decem ber 31,1997, there were four outstanding contracts, with remaining terms of between 11 months and eight years. Concentrations of Credit Risk The company's financial instruments that are exposed to concentrations of credit risk consist primarily of its cash equivalents, marketable securities, derivative financial instruments and trade receivables. The company's short-term investments are placed with various foreign governments and a wide array of financial institutions with high credit ratings. This diversified invest ment policy limits the company's exposure both to credit risk and to concentrations of credit risk. Similar standards of diversity and creditworthiness are applied to the company's counterparties in derivative instruments. The trade receivable balances, reflecting the company's diversified sources of revenue, are dispersed among the com pany's broad customer base worldwide. As a consequence, concentrations of credit risk are limited. The company rou tinely assesses the financial strength of its customers. Letters of credit are the principal security obtained to support lines of credit or negotiated contracts when the financial strength of a customer is not considered sufficient. Fair Value Fair values are derived either from quoted market prices where available or, in their absence, the present value of the expected cash flows. The fair values reflect the cash that would have been received or paid if the instruments were settled at year-end. At December 31,1997 and 1996, the fair values of the financial and derivative instruments were as follows: Long-term debt of $1,414 and $1,850 had estimated fair values of $1,481 and $1,915. The notional principal amounts of the interest rate swaps totaled $1,050 and $1,199, with approximate fair values total ing $(16) and $(1). The notional amounts of these and other derivative instruments do not represent assets or liabilities of the company but, rather, are the basis for the settlements under the contract terms. The company holds cash equivalents and U.S. dollar marketable securities in domestic and offshore portfolios. Eurodollar bonds, floating-rate notes, time deposits and com mercial paper are the primary instruments held. Cash equiva lents and marketable securities had fair values of $1,483 and $1,472. Of these balances, $828 and $727 classified as cash equivalents had average maturities under 90 days, while the remainder, classified as marketable securities, had average maturities of three years and one year. For other derivatives the contract or notional values were as follows: Crude oil and products futures had net contract values of $4 and $57, approximating their fair values. For ward exchange contracts had contract values of $47 and $231, approximating their fair values. Gas swap contracts, based on notional gas volumes of approximately 75 and 78 billion cubic feet, had negative fair values totaling $(2) and $(8). Deferred gains and losses that have been accrued on the Consolidated Balance Sheet are not material. NOTE 7. SUMMARIZED FINANCIAL DATA - CHEVRON U.S.A. INC. At December 31,1997, Chevron U.S.A. Inc. was Chevron Corporation's principal operating company, consist ing primarily of the company's U.S. integrated petroleum operations (excluding most of the domestic pipeline opera tions). In 1997, these operations were conducted primarily by two divisions: Chevron U.S.A. Production Company and Chevron Products Company. Prior to September 1,1996, Chevron U.S.A. Inc.'s natural gas liquids operations were con ducted by its Warren Petroleum Company division, and its natural gas marketing operations were conducted by Chevron U.S.A. Production Company. Beginning September 1, 1996, these operations are carried out through its 28 percent equity ownership in NGC Corporation. Summarized financial infor mation for Chevron U.S.A. Inc. and its consolidated subsidi aries is presented below: Year ended December 31 1997 1996 1995* Sales and other operating revenues $28,130 Total costs and other deductions 26,354 Net income (loss) 1,484 $29,726 28,331 1,042 $24,392 25,177 (384) *1995 Net income (lass) includes $(490) for the company*; adoption of SFAS No. 121. Current assets Other assets Current liabilities Other liabilities Net equity At December 31 1997 1996 $ 2,854 13,867 3,282 4,966 8,473 $ 3,126 13,209 4,035 5,300 7,000 NOTE 8. LITIGATION The company is a defendant in numer ous lawsuits, including, along with other oil companies, actions challenging oil and gas royalty and severance tax pay ments based on posted prices. Plaintiffs may seek to recover large and sometimes unspecified amounts, and some matters may remain unresolved for several years. It is not practical to estimate a range of possible loss for the company's litigation matters, and losses could be material with respect to earnings in any given period. However, management is of the opinion that resolution of the lawsuits will not result in any significant liability to the company in relation to its consolidated finan cial position or liquidity. OXY U.S.A. brought a lawsuit in its capacity as successor in interest to Cities Service Company, which involved claims for damages resulting from the allegedly improper termina tion of a tender offer to purchase Cities' stock in 1982 made by Gulf Oil Corporation, acquired by Chevron in 1984. A trial with respect to the claims ended in July 1996 with a judg ment against the company of $742, including interest that CHEV BB |0002752 45 intvRUN CORPORATION 1997 ANNUAL REPORT Notes to Consolidated Financial Statements Millions of dollars, except per-share amounts NOTE 8. LITIGATION - Continued continues to accrue at a rate of 9.55 percent per year. The company has filed an appeal and posted a bond for 1.5 times the amount of the judgment. While the ultimate outcome of this matter cannot be determined presently with certainty, the company believes that errors were committed by the trial court that should result in the judgment being reversed on appeal. NOTE 9. SUMMARIZED FINANCIAL DATA - CHEVRON TRANS PORT CORPORATION Chevron Transport Corporation (CTC), a Liberian corporation, is an indirect, wholly owned subsidiary of Chevron Corporation. CTC is the principal operator of Chevron's international tanker fleet and is engaged in the marine transportation of oil and refined petroleum products. Most of CTC's shipping revenue is derived by providing trans portation services to other Chevron companies. Chevron Cor poration has guaranteed this subsidiary's obligations in connection with certain debt securities where CTC is deemed to be an issuer. In accordance with the Securities and Exchange Commission's disclosure requirements, summarized financial information for CTC and its consolidated sub sidiaries is presented below. This information was derived from the financial statements prepared on a stand-alone basis in conformity with generally accepted accounting principles. Separate financial statements and other disclosures with respect to CTC are omitted as such separate financial state ments and other disclosures are not material to investors in the debt securities deemed issued by CTC. There were no restrictions on CTC's ability to pay dividends or make loans or advances at December 31,1997. Year Ended December 31 1997 1996 1995 Sales and other operating revenues Total costs and other deductions Net income (loss) $591 557 28 $512 564 11 $462 477 (23) At December 31 1997 1996* Current assets Other assets Current liabilities Other liabilities Net equity $243 897 666 311 163 $ 99 1,593 617 356 719 Certain amounts in 1996 have been reclassified to conform to 1997 presentation. The 1997 decrease in "Other assets" and "Net equity" was primarily due to the 1997 assignment of an interest-bearing loan agreement to CTC's parent and an associated return of paid-in capital. NOTE 10. GEOGRAPHIC AND SEGMENT DATA The geographic and segment distributions of the company's identifiable assets, operating income, and sales and other operating revenues are summarized in the following tables: CHEV bb 6 3002753 IDENTIFIABLE ASSETS United States Petroleum Chemicals Coal and Other Minerals Total United States International Petroleum Chemicals Coal and Other Minerals Total International TOTAL IDENTIFIABLE ASSETS Corporate and Other TOTAL ASSETS 1997 $13,957 2,828 483 17,268 13,562 690 54 14,306 31,574 3,899 $35,473 At December 31 1996 1995 $14,226 2,475 477 17,178 $14,521 2,115 503 17,139 13,893 514 34 14,441 31,619 3,235 $34,854 13,392 409 28 13,829 30,968 3,362 $34,330 Identifiable assets for the business segments include all assets associated with operations in the indicated geographic areas, including investments in affiliates. "Corporate and Other" identifiable assets consist primarily of cash and marketable securities, corporate real estate and information systems. Year ended December 31 1997 1996 1995 OPERATING INCOME United States Petroleum Chemicals Coal and Other Minerals Total United States International Petroleum Chemicals Coal and Other Minerals Total International TOTAL OPERATING INCOME Corporate and Other Income Tax Expense NET INCOME $2,507 216 49 2,772 $1,922 219 58 2,199 $ (64) 689 (42) 583 3,042 146 10 3,198 5,970 (468) (2,246) $3,256 3,099 80 6 3,185 5,384 (644) (2,133) $2,607 2,074 96 3 2,173 2,756 (967) (859) $ 930 Operating income in 1995 included asset impairment write-downs of $998 in connection with the adoption of SFAS No. 121, as follows: U.S. Petroleum - $754; U.S. Chemicals $20; U.S. Coal and Other Minerals - $97; International Petro leum - $127. Corporate and Other included other write-downs of $19. Sales and other operating revenues for the petroleum seg ments are derived from the production and sale of crude oil, natural gas and natural gas liquids, and from the refining and marketing of petroleum products. The company also obtains revenues from the transportation and trading of crude oil and refined products. Chemicals revenues result primarily from the sale of petrochemicals, plastic resins, and lube oil and fuel additives. Coal and other minerals revenues relate primarily to coal sales. The company's real estate and insurance operations and worldwide cash management and financing activities are in "Corporate and Other." In 1996, the company completed the sale of most of its real estate development assets. Sales and other operating revenues in the following table include both sales to unaffiliated customers and sales from the transfer of products between segments. Sales from the transfer NOTE 10. GEOGRAPHIC AND SEGMENT DATA -Continued of products between segments and geographic areas are generally at estimated market prices. Transfers between geo graphic areas are presented as memo items below the table. Year ended December 31 1997 1996 1995 SALES AND OTHER OPERATING REVENUES United States Petroleum-Refined products -Crude oil -Natural gas -Natural gas liquids -Other -Excise taxes -Intersegment Total Petroleum Chemicals-Products -Intersegment Total Chemicals Coal and Other Minerals Total United States International Petroleum-Refined products -Crude oil -Natural gas -Natural gas liquids -Other -Excise taxes -Intersegment Total Petroleum Chemicals-Products -Excise taxes -Intersegment Total Chemicals Coal and Other Minerals Total International Intersegment sales elimination Corporate and Other TOTAL SALES AND OTHER OPERATING REVENUES $12,586 4,527 1,978 344 612 3,386 340 23,773 2,933 112 3,045 359 27,177 $12,295 4,836 2,741 992 683 3,231 587 25,365 2,831 105 2,936 329 28,630 $10,677 3,850 1,604 1,130 717 2,999 676 21,653 3,157 175 3,332 350 25,335 2,998 6,770 590 209 497 2,188 1 13,253 587 - 2 589 10 13,852 (455) 9 3,490 7,561 558 175 501 1,959 3 14,247 591 12 2 605 11 14,863 (697) (14) 2,794 5,526 415 155 429 1,977 11,296 600 12 9 621 7 11,924 (860) (89) $40,583 $42,782 $36,310 Memo: Intergeographic Sales United States International $ 510 1,187 $ 695 1,319 $ 565 1,077 Equity in earnings of affiliated companies has been associ ated with the segments in which the affiliates operate. Sales to the Caltex Group and NGC Coqioration are included in the "International Petroleum" and "United States Petroleum" seg ments, respectively. Information on the Caltex, Tengizchevroil and NGC affiliates is presented in Note 12. Other affiliates are either not material or not vertically integrated with a segment's operations. NOTE 11. LEASE COMMITMENTS Certain noncancelable leases are classified as capital leases, and the leased assets are included as part of "Properties, plant and equipment." Other leases are classified as operating leases and are not capitalized. Details of the capitalized leased assets are as follows: Petroleum Exploration and Production Refining, Marketing and Transportation Less: accumulated amortization Net capitalized leased assets At December n "l997 ^ $5 756 761 371 $390 $6 806 812 389 $423 At December 31,1997, the future minimum lease pay ments under operating and capital leases are as follows: Year 1998 1999 2000 2001 2002 Thereafter Total Less: amounts representing interest and executory costs Net present values Less: capital lease obligations included in short-term debt Long-term capital lease obligations Future sublease rental income At December 31 Operating leases Capital Leases $140 120 101 94 86 233 $774 $ 139 70 63 59 54 740 1,125 (525) 600 $ 18 (308) $ 292 $- Rental expenses incurred for operating leases during 1997,1996 and 1995 were as follows: Year ended December 31 1997 1996 1995 Minimum rentals Contingent rentals - Total Less: sublease rental income Net rental expense $443 5 448 5 $443 $438 6 444 15 $429 $403 9 412 14 $398 Contingent rentals are based on factors other than the passage of time, principally sales volumes at leased service stations. Certain leases include escalation clauses for adjusting rentals to reflect changes in price indices, renewal options ranging from one to 25 years and/or options to purchase the leased property during or at the end of the initial lease period for the fair market value at that time. NOTE 12. INVESTMENTS AND ADVANCES Chevron owns 50 percent each of PT. Caltex Pacific Indonesia (CPI), an explo ration and production company operaung in Indonesia; Caltex Petroleum Corporation (CPC), which, through its subsidiaries and affiliates, conducts refining and marketing activities in Asia, Africa, the Middle East, Australia and New Zealand; and American Overseas Petroleum Limited, which, through its subsidiary, manages certain of the company's operations in Indonesia. These companies and their subsidiaries and affili ates are collectively called the Caltex Group. Tengizchevroil (TCO) is a joint venture formed to devel op the Tengiz and Korolev oil fields over a 40-year period. In April 1997, Chevron sold 10 percent of its interest in TCO to CHEV BB ^0002754 47 'Notes to Consolidated Financial Statements Millions ofdollars, except per-share amounts NOTE 12. INVESTMENTS AND ADVANCES -Continued an affiliate of LUKoil, a Russian oil company, and Arco. The sale reduces Chevron's ownership to 45 percent. The invest ment in TCO at December 31,1997 and 1996, included a de ferred payment portion of $429 and $428, respectively, $420 of which is payable to the Republic of Kazakhstan upon the attainment of a dedicated export system with the capability of the greater of 260,000 barrels of oil per day or TCO's produc tion capacity. This portion of the investment was recorded upon formation of the venture as the company believed at the time, and continues to believe, that its payment is beyond a reasonable doubt given the original intent and continuing commitment of both parties to realizing the full potential of the venture over its 40-year life. Chevron owns 28 percent of NGC Corporation (NGC), a gatherer, processor, transporter and marketer of energy prod ucts in North America and the United Kingdom, including natural gas, natural gas liquids, crude oil and electricity. The market value of Chevron's shares of NGC common stock at December 31,1997, was $679 based on quoted market prices. Investments in and advances to companies accounted for using the equity method, and other investments accounted for at or below cost, are as follows: At December 31 1997 1996 Equity Method Affiliates Caltex Group Exploration and Production Refining, Marketing and Transportation Total Caltex Group Tengizchevroil NGC Corporation Other affiliates Other, at or below cost Total investments and advances $ 438 1,863 2,301 1,255 385 347 4,288 208 $4,496 $ 449 1,815 2,264 1.240 416 364 4,284 179 $4,463 Equity in earnings of companies accounted for by the equity method, together with dividends and similar distribu tions received from equity method companies for the years 1997,1996 and 1995, are as follows: Caltex Exploration . and Production Refining, Marketing and Transportation Total Caltex Group Tengizchevroil NGC Corporation Other Total Year ended December 31 Equity in tamings ____________ Dividends 1997 1996 1995 1997 1996 1995 $171 $188 $156 252 408 294 423 596 450 169 110 1 (35) 19 131 42 102 $688 $767 $553 $207 $735 $305 --2 1- 96 92 116 $305 $828 $421 Effective October 1,1997, Caltex's management changed the functional currency for its Korean and Japanese equity affiliates from their local currencies to the U.S. dollar, based on significandy changed economic facts and circumstances, primarily changing regulatory environments in those coun tries. Caltex's earnings in 1997 include significant foreign cur rency gams, mostly related to net deferred tax benefits resulting from local currency losses on the translation of U.S. dollar debt of affiliates. The company's transactions with affiliated companies are summarized in the following table. These are primarily for the purchase of Indonesian crude oil from CPI, the sale of crude oil and products to CPC's refining and marketing companies, the sale of natural gas to NGC, and the purchase of natural gas and natural gas liquids from NGC. "Accounts and notes receivable" in the Consolidated Bal ance Sheet include $145 and $258 at December 31,1997 and 1996, respectively, of amounts due from affiliated companies. "Accounts payable" include $57 and $39 at December 31, 1997 and 1996, respectively, of amounts due to affiliated companies. year ended December 31 1997 1996 1995 Sales to Caltex Group Sales to NGC Corporation Sales to other affiliates Total sales to affiliates $1,335 1,822 8 $3,165 $1,708 676 18 $2,402 $1,330 - 10 $1,340 Purchases from Caltex Group Purchases from NGC Corporation Purchases from other affiliates $ 932 854 16 $1,022 269 41 $ 934 - 40 Total purchases from affiliates $1,802 $1,332 $ 974 The following tables summarize the combined financial information for the Caltex Group and all of the other equity method companies together with Chevron's share. Amounts shown for the affiliates are 100 percent. Year ended December 31 1997 Caltex Group 1996 1995 1997 Other Affiliates 1996 1995 1997 Chevron's Share 1996 1995 Sales and other operating revenues Total costs and other deductions Net income $17,920 17,147 846 $16,895 15,991 1,193 $15,067 14,256 899 $16,574 15,770 556 $6,356 5,829 404 $2,594 2,194 315 $13,827 13,118 688 $10,218 9,573 767 $8,549 7,804 553 At December 31 Current assets Other assets Current liabilities Other liabilities Net equity 1997 Caltex Group 1996 1995 $ 2,521 7,193 2,991 2,131 4,592 $ 2,681 6,714 2,999 2,140 4,256 $ 2,323 7,794 3,223 1,935 4,959 1997 $ 3,232 6,713 2,565 5,448 1,932 Other Affiliates 1996 1995 $3,286 6,088 2,064 5,034 2,276 $ 877 3,888 413 3,341 1,011 CHEVBB 0002755 1997 $ 2,289 5,971 2,232 1,740 4,288 Chevron's Share 1996 1995 $ 2,284 5,524 2,076 1,448 4,284 $1,527 5,414 1,863 1,154 3,924 NOTE 13. PROPERTIES, PLANT AND EQUIPMENT United States Petroleum Exploration and Production Refining and Marketing2 Chemicals Coal and Other Minerals Total United States International Petroleum Exploration and Production Refining and Marketing Chemicals Coal and Other Minerals Total International Corporate and Other3 Total Gross Investment at Cost 1997 1996 1995 1997 $18,104 11,378 3,039 833 33,354 $17,742 11,186 2,587 819 32,334 $18,209 $ 5,052 11,136 6,186 2,075 1,931 857 341 32,277 13,510 11,696 2,063 549 55 14,363 1,516 $49,233 10,484 2,259 393 32 13,168 1,434 $46,936 10,951 2,459 354 22 6,639 1,210 309 53 13,786 8,211 1,968 950 $48,031 $22,671 At December 31 Year ended Dn-.mh- 11 Net Investment Additions at Cost1 1996 1995 1997 1996 1995 Depreciation Exn.n. 1997 1996 1995 $ 4,849 6,295 1,552 345 13,041 $ 5,010 $1,166 $ 974 $ 776 $ 887 6,520 538' 415 887 464 1,233 470 376 168 92 359 35 17 33 38 13,122 2,209 1,782 1,864 1,481 S 785 472 138 36 1,431 $1,577 564 162 135 2,438 5,998 1,387 163 28 7,576 879 $21,496 5,463 1,674 146 1,285 57 157 19 26 7,302 1,525 1,272 74 $21,696 $3,808 1,221 70 37 10 1,338 76 $3,196 1,421 335 634 111 26 12 -1 1,782 758 203 61 $3,849 $2,300 581 712 115 116 24 24 11 721 853 64 90 $2,216 $3,381 'Net of dry hole expense related to prior years' expenditures of S31, S55 and S19in 1997,1996 and 1995, respectively includes transportation. includes primarily real estate and management information systems. Expenses for maintenance and repairs were $738, $626 and $833 in 1997,1996 and 1995, respectively. NOTE 14. TAXES Taxes other than on income United States Excise taxes on products and merchandise Property and other miscellaneous taxes Payroll taxes Taxes on production Total United States International Excise taxes on products and merchandise Property and other - miscellaneous taxes Payroll taxes Taxes on production Total International Total taxes other than on income Year ended December 31 1997 1996 1995 $3,386 $3,231 $2,999 274 123 118 3,901 274 123 121 3,749 341 127 105 3,572 2,188 1,971 1,989 185 23 10 2,406 $6,307 157 26 5 2,159 $5,908 146 30 11 2,176 $5,748 U.S. federal income tax expense was reduced by $93, $77 and $68 in 1997, 1996 and 1995, respectively, for lowincome housing and other business tax credits. In 1997, before-tax income, including related corporate and other charges, for U.S. operations was $2,054, compared with $1,631 in 1996 and a loss of $(331) in 1995, and for international operations was $3,448, $3,109 and $2,120 in 1997, 1996 and 1995, respectively The deferred income tax provisions included (costs) ben efits of $(304), $(204) and $75 related to properties, plant and equipment in 1997,1996 and 1995, respectively Benefits were recorded in 1995 of $358 related to the impairment of long-lived assets and $91 related to the provision for the ex pected loss from exiting the real estate develoDmenr bucinccc Year ended December 31 1997 1996 1995 Taxes on income U.S. federal Current Deferred State and local $ 369 357 81 Total United States 807 International Current 1,174 Deferred 265 Deferred - Adjustment for enacted changes in tax laws/rates - $ 360 165 59 584 1,356 193 - $ 152 (289) 29 (108) 937 14 16 Total International Total taxes on income 1,439 $2,246 1,549 $2,133 967 $ 859 The company's effective income tax rate varied from the U.S. statutory federal income tax rate because of the following: Year ended December 31 1997 Statutory U.S. federal income tax rate 35.0% Effect of income taxes from international 1996 35.0% 1995 35.0% operations in excess of taxes at the U.S. statutory rate State and local taxes on income, net 9.6 16.8 26.2 of U.S. federal income tax benefit 1.3 0.9 0.9 Prior-year tax adjustments (0.3) (0.2) 0.3 Tax credits (1.7) (1.6) (3.8) All other (1.7) (3.6) (3-D Consolidated companies 42.2 47.3 55.5 Effect of recording equity in income of certain affiliated companies on an after-tax basis (1.4) (2.3) (7.5) Effective tax rate 40.8% 45.0% 48.0% CHEV BB 0002756 49 intVKUN CORPORATION 1997 ANNUAL REPORT Notes to Consolidated Financial Statements Millions ofdollars, except per-share amounts NOTE 14. TAXES -Confirmed The company records its deferred taxes on a tax jurisdic tion basis and classifies those net amounts as current or noncurrent based on the balance sheet classification of the related assets or liabilities. At December 31,1997 and 1996, deferred taxes were classified in the Consolidated Balance Sheet as follows: At December 31 1997 1996 Prepaid expenses and other current assets Deferred charges and other assets Federal and other taxes on income Noncurrent deferred income taxes Total deferred income taxes, net S (13) (181) 79 3,215 $3,100 $ (136) (163) 3 2,851 $2,555 The reported deferred tax balances are composed of the following deferred tax liabilities (assets): At December 31 1997 1996 Properties, plant and equipment Inventory Miscellaneous Deferred tax liabilities Abandonment/environmental reserves Employee benefits AMT/other tax credits Other accrued liabilities Miscellaneous Deferred tax assets Deferred tax assets valuation allowance Total deferred taxes, net $4,724 151 200 5,075 (872) (596) (362) (202) (382) (2,414) 439 $3,100 $4,534 193 195 4,922 (1,052) (561) (586) (332) (523) (3,054) 687 $2,555 It is the company's policy for subsidiaries included in the U.S. consolidated tax return to record income tax expense as though they filed separately, with the parent recording the ad justment to income tax expense for the effects of consolidation. Undistributed earnings of international consolidated sub sidiaries and affiliates for which no deferred income tax provi sion has been made for possible future remittances totaled approximately $4,500 at December 31, 1997. Substantially all of this amount represents earnings reinvested as part of the company's ongoing business. It is not practical to estimate the amount of taxes that might be payable on the eventual remit tance of such earnings. On remittance, certain countries im pose withholding taxes that, subject to certain limitations, are then available for use as tax credits against a U.S. tax liability, if any. The company estimates withholding taxes of approxi mately $196 would be payable upon remittance of these earnings. NOTE 15. SHORT-TERM DEBT Redeemable long-term obliga tions consist primarily of tax-exempt variable-rate put bonds that are included as current liabilities because they become redeemable at the option of the bondholders during the year following the balance sheet date. The company has entered into interest rate swaps on a portion of its short-term debt. At December 31, 1997 and 50 1996, the company had swapped notional amounts of $1,050 of floating rate debt to fixed rates, in addition, at December 31, 1996, the company had swapped $149 of debt classified as "Current maturities of long-term debt" from a fixed rate to a floating rate. The effect of these swaps on the company's interest expense was not material. At December 31 1997 1996 Commercial paper1 Current maturities of long-term debt Current maturities of long-term capital leases Redeemable long-term obligations Long-term debt Capital leases Notes payable Subtotal2 Reclassified to long-term debt Total short-term debt $3,352 303 35 $3,583 269 36 304 273 95 4,362 (2,725) $1,637 315 274 29 4,506 (1,800) $2,706 Weighted average interest rates at December 31,1997 and 1996, were 6.1% and 5.9%, respectively, including the effect of interest rate swaps. 2Wrighted average interest rotes at December 31, 2997 and 1996, were 6.0% and 5.6%, respectively, including the effect of interest rate swops. NOTE 16. LONG-TERM DEBT Chevron and one of its wholly owned subsidiaries each have "shelf' registrations on file with the Securities and Exchange Commission that together would permit the issuance of $1,300 of debt securities pursuant to Rule 415 of the Securities Act of 1933. At year-end 1997, the company had $4,050 of committed credit facilities with banks worldwide, $2,725 of which had termination dates beyond one year. The facilities support the company's commercial paper borrowings. Interest on any bor rowings under the agreements is based on either the London Interbank Offered Rate or the Reserve Adjusted Domestic Certificate of Deposit Rate. No amounts were outstanding under these credit agreements during the year nor at year-end. . 8.11% amortizing notes due 20041 7.45% notes due 2004 7.61% amortizing bank loans due 2003 5.6% notes due 1998 6.92% bank loans due 2005 9.75% sinking-fund debentures due 2017 4.625% 200 million Swiss franc issue due 1997* 7.28% notes due 19971 Other foreign currency obligations (4.1%)3 Other long-term debt (7.0%)3 Total including debt due within one year Debt due within one year Reclassified from short-term debt Total long-term debt At December 31 1997 1996 $ 750 349 200 190 51 38 - - 85 54 1,717 (303) 2,725 $4,139 $ 750 349 225 190 51 180 149 50 88 87 2,119 (269) 1,800 $3,650 1 Guarantee of ESOP debt. zlnterest rate swaps effectively changed the fixed inrcrcs: rate to a floating rate, which was 2.24% at year-end 1996. ^Less than $50 million individually; weighted average interest rates at December 31, 2997. CHEV BB 3002757 iHtVRON CORPORATION 1997 ANNUAL REPORT NOTE 16. LONG-TERM DEBT -Continu'd At December 31,1997, the company classified $2,725 of short-term debt as long-term, compared to $1,800 of short term debt classified as long-term at December 31,1996. The change results from a greater amount of the company's com mitted credit facilities with termination dates beyond one year. Settlement of these obligations is not expected to require the use of working capital in 1998, as the company has both the intent and ability to refinance this debt on a long-term basis. Consolidated long-term debt maturing in each of the five years after December 31,1997, is as follows: 1998-$303, 1999-$121, 2000-$ 124, 2001-5137 and 2002-5148. NOTE 17. EMPLOYEE BENEFIT PUNS Pension Plans The company has defined benefit pension plans for most employees. The principal plans provide for automatic membership on a noncontributory basis. The retirement benefits provided by these plans are based primar ily on years of service and on average career earnings or the highest consecutive three years' average earnings. The com pany's policy is to fund at least the minimum necessary to satisfy requirements of the Employee Retirement Income Security Act. The net pension (credit) expense for all of the company's pension plans for the years 1997,1996 and 1995 consisted of: 1997 1996 1996 Cost of benefits earned during the year Interest cost on projected benefit obligations $106 $104 $ 99 274 271 273 Actual return on plan assets Net amortization and deferral (697) (503) (728) 304 129 342 Net pension (credit) expense S<13) $ 1 $(14) Setdement gains in 1997,1996 and 1995, related to lump-sum payments, totaled $29, $28 and $7 respectively. Charges for termination benefits totaled $13 in 1997 and $5 in 1995. There were no charges in 1996. At December 31, 1997 and 1996, the weighted average discount rates, the long-term rates for compensation increases used for estimating the benefit obligations, and the expected rates of return on plan assets were as follows: 1997 1996 Assumed discount rates Assumed rates for compensation increases Expected return on plan assets 7.3% 5.2% 9.1% 7.7% 5.2% 9.1% The pension plans' assets consist primarily of common stocks, bonds, cash equivalents and interests in real estate investment funds. The funded status for the company's com bined plans at December 31,1997 and 1996, was as follows: At December 31 Plans with Assets in Excess of Accumulated Benefits 1997 1996 Plans with Accumulated Benefits in Excess of Plan Assets 1997 1996 Actuarial present value of: Vested benefit obligations $(3,145) $(2,932) $(250) $(231) Accumulated benefit obligations $(3,294) 5(3,072) $(258) $(237) Projected benefit obligations $(3,768) $(3,515) $(301) $(270) Plan assets at fair values 4,448 4,156 67 Plan assets greater (less) than projected benefit obligations 680 641 (295) (263) Unrecognized net transition (assets) liabilities (136) (169) 10 13 Unrecognized net (gains) losses (206) (176) 90 68 Unrecognized prior-service costs 97 79 5 6 Minimum liability adjustment - - (85) (67) Net pension cost prepaid (accrued) $ 435 $ 375 $(243) 1 The net transition assets and liabilities generally are being amortized by the straight-line method over 15 years. Profit Sharing/Savings Plan Eligible employees of the com pany and certain of its subsidiaries who have completed one year of service may participate in the Profit Sharing/Savings Plan. Charges to expense for the profit sharing part of the Profit Sharing/Savings Plan and the Savings Plus Plan, which was merged with the Profit Sharing/Savings Plan at the end of 1995, after shareholders' approval, were $79, $92 and $99 in 1997,1996 and 1995, respectively. Commencing in October 1997, the company's Savings Plus Plan contributions are being funded with leveraged ESOP shares. Employee Stock Ownership Plan (ESOP) In December 1989, the company established a leveraged ESOP as part of the Profit Sharing/Savings Plan. The ESOP Trust Fund borrowed $1,000 and purchased 28.2 million previously unissued shares of the company's common stock. The ESOP provides a partial pre-funding of the company's future commitments to the profit sharing part of the Plan, which will result in annual income tax savings for the company. The ESOP is expected to satisfy most of the company's obligations to the profit sharing part of the Plan during the next seven years. As allowed by AICPA Statement of Position (SOP) 93-6, the company has elected to continue its practices, which are based on SOP 76-3 and subsequent consensus of the Emerg ing Issues Task Force of the Financial Accounting Standards Board. Accordingly, the debt of the ESOP is recorded as debt, and shares pledged as collateral are reported as deferred com pensation in the Consolidated Balance Sheet and Statement of Stockholders' Equity. The company reports compensation expense equal to the ESOP debt principal repayments less dividends received by the ESOP. Interest incurred on the ESOP debt is recorded as interest expense. Dividends paid on ESOP shares are reflected as a reduction of retained earnings. All ESOP shares are considered outstanding for eamings-per- share computations.,,,__ CHEVBB 0002758 51 Notes to Consolidated Financial Statements Millions of dollars, except per-share amounts NOTE 17. EMPLOYEE BENEFIT PLANS -Continued The company recorded expense for the ESOP of $53, $61 and $67 in 1997,1996 and 1995, respectively, including $61, $65 and $68 of interest expense related to the ESOP debt. All dividends paid on the shares held by the ESOP are used to service the ESOP debt. The dividends used were $57, $53 and $50 in 1997,1996 and 1995, respectively. The company made contributions to the ESOP of $55, $62 and $69 in 1997,1996 and 1995, respectively, to satisfy ESOP debt service in excess of dividends received by the ESOP The ESOP shares were pledged as collateral for its debt. Shares are released from a suspense account and allocated to profit sharing accounts of Plan participants, based on the debt service deemed to be paid in the year in proportion to the total of current year and remaining debt service. Compensa tion expense was $(8), $(4) and $(1) in 1997,1996 and 1995, respectively. The ESOP shares as of December 31,1997 and 1996 were as follows: Thousands 1997 1996 Allocated shares Unallocated shares 9,287 15,929 7,805 17,682 Total ESOP shares 25,216 25,487 Nonpension postretirement benefits are not pre-funded by the company, but are paid when incurred. The accumulated postretirement benefit obligation (APBO) and unrecognized gains and losses for these plans are recorded in the Consoli dated Balance Sheet as follows: At December 31, 1997 Health Life Total At December 31, 1996 Health Life Total APBO Retirees Fully eligible $ (495)5(356)$ (851)5 (456)5(327)5 (783) active participants (162) (80) (242) (142) (75) (217) Other active participants (222) (47) (269) (192) (44) (236) Total APBO (879) (483) (1,362) (790) (446) (1,236) Fair value of plan assets APBO greater than plan assets Unrecognized (879) (483) (1,362) (790) (446) (1,236) net (gain) loss (140) 16 (124) (226) (4) (230) Accrued postretirement benefit costs $(1,019)5(467)5(1,486)5(1,016)5(450)5(1,466) Management Incentive Plans The company has two incentive plans, the Management Incentive Plan (MIP) and the Long-Term Incentive Plan (LTIP) for officers and other regular salaried employees of the company and its subsidi aries who hold positions of significant responsibility. The MIP is an annual cash incentive plan that links awards to perform ance results of the prior year. The cash awards may be deferred by conversion to stock units or, beginning with awards de ferred in 1996, stock units or other investment fund alterna tives. Awards under the LTIP may take the form of, but are not limited to, stock options, restricted stock, stock units and nonstock grants. Charges to expense for the combined man agement incentive plans, excluding expense related to LTIP stock options, which is discussed in Note 18, "Stock Options," were $55, $36 and $45 in 1997,1996 and 1995, respectively. Chevron Success Sharing In January 1995, the company established a program that provides eligible employees with an annual cash bonus if the company achieves certain finan cial and safety goals. The total maximum payout under the program is 8 percent of the employee's annual salary. Charges for the program were $116 and $72 in 1997 and 1996, respec tively. There were no expenses accrued for the program in 1995. Other Benefit Plans In addition to providing pension bene fits, the company makes contributions toward certain health care and life insurance plans for active and qualifying retired employees. Substantially all employees in the United States and in certain international locations may become eligible for coverage under these benefit plans. The company's annual contributions for medical and dental benefits are limited to the lesser of actual medical and dental claims or a defined fixed per-capita amount. Life insurance benefits are paid by the company, and annual contributions are based on actual plan experience. CHEV BB 0002759 The company's net postretirement benefits expense was as follows: 1997 1996 1995 Health Life Total Health Life Total Health Life Total Cost of benefits earned during the year $14 $ 3 $17 516 5 3 5 19 515 5 3 5 18 Interest cost on benefit obligation 57 33 90 58 33 91 67 30 97 Net amortization of gain (11) - (11) (8) - (8) (9) (2) (11) Net expense for post retirement benefits $60 $36 $96 566 536 5102 573 531 5104 For measurement purposes, separate health care costtrend rates were utilized for pre-age 65 and post-age 65 retirees. The 1998 annual rates of change were assumed to be 3.4 percent and 9.2 percent, respectively, before gradually converging to the average ultimate rate of 5.1 percent in 2014 for both pre-age 65 and post-age 65. An increase in the assumed health care cost-trend rates of 1 percent in each year would increase the aggregate of service and interest costs for the year 1997 by $19 and would increase the December 31, 1997 APBO by $122. At December 31,1997, the weighted average discount rate was 7.0 percent, and the assumed rate of compensation increase related to the measurement of the life insurance ben efit was 5.0 percent. NOTE 18. STOCK OPTIONS The company applies APB Opinion No. 25 and related Interpretations in accounting for stock options awarded under its Broad-Based Employee Stock NOTE 18. STOCK OPTIONS - Continued Option Plan and its Long-Term Incentive Plan, which are described below. Had compensation cost for the company's stock options been determined based on the fair market value at the grant dates of the awards consistent with the methodol ogy prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the company's net income and earnings per share for 1997,1996 and 1995 would have been the pro forma amounts indicated below: 1997 1996 1995 Net Income As reported $3,256 $2,607 $930 Pro forma $3,302 $2,610 $925 Earnings per share As reported - basic $4.97 - diluted $4.95 Pro forma - basic $5.04 - diluted $5.02 S3.99 $3.98 $3.99 $3.98 $1.43 $1.43 $1.42 $1.42 The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards granted prior to 1995. In addition, certain options vest over several years, and awards in future years, whose terms and conditions may vary, are anticipated. Long-Term Incentive Plan Stock options granted under the LT1P are generally awarded at market price on the date of grant and are exercisable not earlier than one year and not later than 10 years from the date of grant. However, a portion of the LTIP options granted in 1996 had terms similar to the broad-based employee stock options, which are described below. The maximum number of shares of common stock that may be granted each year is 1 percent of the total outstanding shares of common stock as ofJanuary 1 of such year. A summary of the status of stock options awarded under the company's LTIP, excluding awards granted with terms sim ilar to the broad-based employee stock options, for 1997, 1996 and 1995 is presented below: Weighted- Average Options Exercise (000s) Price - Outstanding at December 31, 1994 5,842 $39.08 Granted Exercised Forfeited Outstanding at December 31,1995 1,826 (498) (83) 7,087 48.15 37.09 47.77 $41.46 Granted Exercised Forfeited Outstanding at December 31,1996 952 (698) (64) 7,277 66.00 38.91 49.45 $44.84 Granted Exercised Forfeited Outstanding at December 31,1997 1,800 (710) (98) 8,269 80.78 38.66 71.54 $52.88 Exercisable at December 31 1995 1996 1997 5,336 6,330 6,504 $39.26 $41.68 $45.31 CHEV BB 0002760 The weighted-average fair market value of options granted in 1997,1996 and 1995 was $17.64, $14.18 and $9.06 per share, respectively. The fair market value of each option granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions for 1997,1996 and 1995, respectively: risk-free interest rate of 6.1, 6.4 and 6.0 percent; dividend yield of 2.8, 3.3 and 3.9 percent; volatility of 15.2,16.1 and 173 percent and expected life of seven years in all years. As of December 31,1997,8,268,654 shares were under option at exercise prices ranging from $31.9375 to $80.9375 per share. The following table summarizes information about stock options outstanding under the LTIP, excluding awards granted with terms similar to the broad-based employee stock options, at December 31,1997: Options Outstanding Options Exercisable Range of Exercise Prices Number Outstanding (000s) Weighted- Average Weighted- Remaining Average Contractual Exercise lift (Years) Price Number Exercisable (000s) WeightedAverage Exercise Price $31 to $41 1,565 3.87 $34.67 1,565 $34.67 41 to 51 51 to 61 61 to 71 4,067 23 855 6.63 8.34 8.83 44.97 56.91 66.25 4,067 23 849 44.97 56.91 66.25 71 to 81 1,759 9.82 80.82 - - $31 to $81 8,269 7.02 $52.88 6,504 $45.31 Broad-Based Employee Stock Options In 1996, the company granted to all eligible employees an option for 150 shares of stock or equivalents at an exercise price of $51,875 per share. In addition, a portion of the awards granted under the LTIP had terms similar to the broad-based employee stock options. When the options were issued in February 1996, vesting was contingent upon one of two conditions being met: if, by December 31,1998, the price of Chevron stock closed at or above $75.00 per share for three consecutive business days or, alternatively, if the company had the highest annual total stockholder return of its competitor group for the years 1994 through 1998. The options vested in June 1997 when the share price performance condition was met. Options for 7,204,800 shares, including similar-termed LTIP awards, were granted in 1996. Forfeitures of options for 302,500 shares reduced the outstanding option shares to 6.902.300 at December 31,1996. In 1997, exercises of 4.171.300 and forfeitures of 516,050 had reduced the out standing option shares to 2,214,950 at year-end 1997. Unex ercised options expire on March 31,1999. Under APB Opinion No. 25, the company recorded expenses of $125 and $29 for these options in 1997 and 1996, respectively. The fair market value of each option share on the date of grant under SFAS No. 123 was estimated at $5.66 using a binomial option-pricing model with the following assump tions: risk-free interest rate of 5,1 percent, dividend yield of 4.2 percent, expected life of three years and a volatility of 20.9 percent. In 1998, the company announced a new broad-based Employee Stock Option Program that granted to all eligible U.S. dollar payroll employees an option that varies from 100 53 Notes to Consolidated Financial Statements Millions ofdollars, except per-share amounts NOTE 18. STOCK OPTIONS - Continued to 300 shares of stock dependent on the employee's salary or job grade. These options vest in two years or, if the company is No. 1 in total shareholder return among its competitor group for the years 1994 through 1998, in one year. Options for approxi mately 4 million shares were awarded at an exercise price of $76.3125 per shasc. The options expire on February 11,2008. Non-U.S. dollar payroll employees, depending on the country of operation, received stock appreciation rights or performance units that are payable only in cash. NOTE 19. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings Per Share," which became effective for reporting periods ending after December 15,1997. Under the previous standard, APB No. 15, the company presented a single earnings per share (EPS) amount that was calculated by dividing net income by the weighted-average number of shares outstanding for the period. Under the provisions of SFAS No. 128, the company will present basic and diluted EPS. Basic EPS includes the effects of award and salary deferrals that are invested in Chevron stock units by certain officers and employees of the company. Diluted EPS includes the effects of these deferrals as well as the dilutive effects of outstanding stock options awarded under the LT1P and Broad-based Employee Stock Option Program (See Note 18. Stock Options). For purposes of comparability, all prior-period eamings-per-share data have been restated to conform with SFAS No. 128. The following table sets forth the computation of basic and diluted EPS: Net Income 1997 Shares Per-Share (millions) Amount ___________________________ 1996_______________________________ 1995 Net Shares Per-Share Net Shares Per-Share Income (millions) Amount Income (millions) Amount Net income Weighted average common shares outstanding Dividend equivalents paid on Chevron stock units Deferred awards held as Chevron stock units BASIC EPS Dilutive effects of stock options DILUTED EPS $ 3,256 2 3,258 $3,258 655.0 1.3 656.3 2.1 658.4 $4.97 $4.95 $ 2,607 3 2,610 $2,610 652.8 1.4 654.2 1.2 655.4 $3.99 $3.98 $930 3 933 $933 652.1 1.4 653.5 .6 654.1 $1.43 $1.43 Options to purchase 1,731,750 shares of common stock at $80.9375 per share were outstanding at year-end but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. These options expire October 29, 2007. NOTE 20. OTHER CONTINGENT LIABILITIES AND COMMIT MENTS The U.S. federal income tax and California franchise tax liabilities of the company have been settled through 1987 and 1991, respectively. In June 1997, the company^ Caltex affiliate received a claim from the U.S. Internal Revenue Service (IRS) for $292 million in excise taxes, $140 million in penalties and $1.6 bil lion in interest. The IRS claim relates to crude oil sales to Japanese customers beginning in 1980. Caltex is challenging the claim and fully expects to prevail. Caltex believes the underlying excise tax claim is wrong and therefore the claim for penalties and interest is wrong. The Caltex claim has been through the appeals process and will next move to court. In February 1998, Caltex provided an initial letter of credit for $2.33 billion to the IRS to pursue the claim. The letter of credit is guaranteed by Chevron and Texaco. In addition, a yet to be decided portion of the claim must be paid in order to proceed to court, Caltex is involved with other IRS tax audits in which no claims have been made. Settlement of open tax years is not expected to have a material effect on the consolidated financial position or liq uidity of the company and, in the opinion of management, adequate provision has been made for income and franchise taxes for all years under examination or subject to future examination. At December 31, 1997, the company and its subsidiaries, as direct or indirect guarantors, had contingent liabilities of $73 for notes of affiliated companies and $31 for notes of others. 54 CHEV BB 3002761 The company and its subsidiaries have certain contingent liabilities with respect to long-term unconditional purchase obligations and commitments, throughput agreements and take-or-pay agreements, some of which relate to suppliers' financing arrangements. The aggregate amount of required payments under these various commitments are: 1998-$313; 1999-$347; 2000-$289; 2001-S207; 2002-$176; 2003 and after-$752. Tojal payments under the agreements were $243 .in 1997, $177 in 1996 and $173 in 1995. The company is subject to loss contingencies pursuant to environmental laws and regulations that in the future may require the company to take action to correct or ameliorate the effects on the environment of prior disposal or release of chemical or petroleum substances by the company or other parties. Such contingencies may exist for various sites includ ing, but not limited to: Superfund sites and refineries, oil fields, service stations, terminals and land development areas, whether operating, closed or sold. The amount of such future cost is indeterminable due to such factors as the unknown magnitude of possible contamination, the unknown timing and extent of the corrective actions that may be required, the determination of the company's liability in proportion to other responsible parties and the extent to which such costs are recoverable from third parties. While the company has pro vided for known environmental obligations chat are probable and reasonably estimable, the amount of future costs may be material to results of operations in the period in which they are recognized. The company does not expect these costs to CHEVRON CORPORATION 1997 ANNUAL REPORT NOTE 20. OTHER CONTINGENT LIABILITIES AND COMMIT MENTS -Continued have a material effect on its consolidated financial position or liquidity. Also, the company does not believe its obligations to make such expenditures has had, or will have, any significant impact on the company's competitive position relative to other domestic or international petroleum or chemical concerns. The company's operations, particularly oil and gas explo ration and production, can be affected by changing economic, regulatory and political environments in the various coun tries, including the United States, in which it operates. In certain locations, host governments have imposed restrictions, controls and taxes, and in others, political conditions have existed that may threaten the safety of employees and the company's continued presence in those countries. Internal unrest or strained relations between a host government and the company or other governments may affect the company's operations. Those developments have, at times, significantly affected the company's operations and related results and are carefully considered by management when evaluating the level of current and future activity in such countries. Areas in which the company has significant operations include the United States, Canada, Australia, United King dom, Congo, Angola, Nigeria, Democratic Republic of Congo, Papua New Guinea, China, Indonesia and Venezuela. The company's Caltex affiliates have significant operations in Indonesia, Korea, Japan, Australia, Thailand, the Philippines, Singapore and South Africa. The company's Tengizchevroil affiliate operates in Kazakhstan. Quarterly Results and Stock Market Data Unaudited Millions of dollars, except per-share amounts 4THQ 3RD Q 2ND Q 1997 1ST Q 4TH Q 3RD Q 2ND Q 1996 1ST Q REVENUES Sales and other operating revenues1' Income from equity affiliates Other income TOTAL REVENUES COSTS AND OTHER DEDUCTIONS Purchased crude oil and products. . operating and other expenses Depreciation, depletion and amortization Taxes other than on income1 Interest and debt expense TOTAL COSTS AND OTHER DEDUCTIONS INCOME BEFORE INCOME TAX EXPENSE INCOME TAX EXPENSE NET INCOME2 . $9,712 $10,130 $ 9,947 $10,794 153 164 193 178 390 34 134 121 10,255 10,328 10,274 11,093 ' - * &S& V.'dv^' $11,265 $10,846 $10,514/ '$10,157 81. 104 ''` 446 . . 136 165 99 . .37' 43 11,511 11,049 10,997 . 10,336 i >'. _ 6,603 657 1,512 85 6,792 548 1,670 69 6,623 549 1,630 76 7,511 546 1,495 82 8,857 1,398 9,079 1,249 8,878 1,396 9,634 1,459 523 522 573 628 $ 875 $ 727 $ 823 $ 831 8,288 603 1,550 90 10,531 980 516 $ '464 7,654 558 1,493 93 9,798 1,251 596 $ 655 7,516 524 1,452 85 9,577 1,420 548 $ 872 . 7,207 531 1,413 96 9,247 1,089 473 $ 616 NET INCOME PER SHARE - BASIC - DILUTED DIVIDENDS PAID PER SHARE COMMON STOCK PRICE RANGE - HIGH -LOW $1.33 $1.33 $0.58 $887. $717* $1.11 $1.10 $0.58 $897s $7372 $1.26 $1.25 $0.58 $777* $617* $1.27 $1.27 $0.54 $727* $637r $0.71 $0.71 $0.54 $687* $607* $1.00 $1.00 $0.54 $637. $557* $1.34 $1.33 $0.50 $627s $5472 $0.94 $0.94 $0.50 $587* $51 1Includes consumer excise taxes of S1.326 S1,487 S 1,447 S1,314 SI ,357 11,324 11,277 11,244 2Spccial credits (charges) included in Net Income S 68 S (S) S (14) S 27 ' S (220 15 1 172 1 The company1 common stock is listed on the Sew York Stock Exchange (trading symbol: CHV), as well as on the Chicago, Pacific, London and Swiss stock exchanges. It also is traded on the Boston, Cincinnati, Detroit and Philadelphia stock exchanges. As of February 20,1998, stockholders of record numbered approximately 122,300. There are no restrictions on the company's ability to pay dividends. Chevron has made dividend payments to stockholders for 86 consecutive years. tt ffl > wsc o 0002762 CHtVRON CORPORATION 1997 ANNUAL REPORT Supplemental Information on Oil and Gas Producing Activities Unaudited In accordance with Statement of Financial Accounting Standards No. 69, "Disclosures About Oil and Gas Produc ing Activities" (SFAS No. 69), this section provides supple mental information on oil and gas exploration and produc ing activities of the company in six separate tables. Tables I through III provide historical cost information pertaining to costs incurred in exploration, property acquisitions and development; capitalized costs; and results of operations. Tables IV through VI present information on the company's estimated net proved reserve quantities, standardized mea sure of estimated discounted future net cash flows related to proved reserves, and changes in estimated discounted future net cash flows. The Africa geographic area includes activities principally in Nigeria, Angola, Congo and Demo cratic Republic of Congo. The "Other" geographic category includes activities in Australia, the United Kingdom North Sea, Canada, Papua New Guinea, Venezuela, China and other countries. Amounts shown for affiliated companies are Chevron's 50 percent equity share in RT. Caltex Pacific Indonesia (CPI), an exploration and production company operating in Indonesia, and its 45 percent (50 percent prior to April 1997) equity share of Tengizchevroil (TCO), an exploration and production partnership operating in the Republic of Kazakhstan. TABLE I - COSTS INCURRED IN EXPLORATION, PROPERTY ACQUISITIONS AND DEVELOPMENT1 Millions of dollars Consolidated Companies Affiliated Companies U.S. Africa Other Total CPI TCO Worldwide YEAR ENDED DECEMBER 31, 1997 Exploration Wells Geological and geophysical Rentals and other Total exploration Property acquisitions2 Proved3 Unproved Total property acquisitions Development TOTAL COSTS INCURRED YEAR ENDED DECEMBER 31, 1996 Exploration Wells Geological and geophysical Rentals and other Total exploration Property acquisitions2 Proved3 Unproved Total property acquisitions Development TOTAL COSTS INCURRED YEAR ENDED DECEMBER 31, 1995 Exploration Wells Geological and geophysical Rentals and other Total exploration Property acquisitions2 Proved3 Unproved Total property acquisitions Development TOTAL COSTS INCURRED $ 278 39 43 360 3 101 104 918 $1,382 $ 99 31 17 147 $149 59 65 273 6 6 461 $614 75 23 98 529 $900 $ 526 129 125 780 84 124 208 1,908 $2,896 $2 16 18 . 159 $177 $- . 152 $152 $ 528 145 125 798 84 124 208 2,219 $3,225 $ 357 16 52 425 $ 75 37 10 122 $126 70 54 250 5 62 67 603 $ 1,095 1 2 .3 465 $590 9 43 52 594 $896 $ 558 123 116 797 15 107 122 1,662 $2,581 $1 8 9 123 $132 $- 50 $ 50 $ 559 131 116 806 15 107 122 1,835 $ 2,763 $ 256 9 47 312 21 31 52 453 S 817 $ 63 29 11 103 $141 37 64 242 56 8 64 640 $807 12 12 568 $822 $ 460 75 122 657 77 51 128 1,661 $2,446 $1 9 - 10 97 $107 $- 7 $7 $ 461 84 122 667 77 51 128 1,765 $ 2,560 'Includes costs incurred whether capitalized or charged to earnings. Excludes support equipment expenditures. Proved amounts include wells, equipment and facilities associated with proved reserves; unproved represent amounts for equipment and facilities not associated with the production of proved reserves. jDo5 not include properties acquired through property exchanges. CHEV BB 0002763 TABLE II - CAPITALIZED COSTS RELATED TO OIL AND GAS PRODUCING ACTIVITIES Millions of dollars Consolidated Companies U.S. Africa Other Total AT DECEMBER 31, 1997 Unproved properties Proved properties and related producing assets Support equipment Deferred exploratory welts Other uncompleted projects GROSS CAPITALIZED COSTS Unproved properties valuation Proved producing properties - Depredation and depletion Future abandonment and restoration Support equipment depredation Accumulated provisions NET CAPITALIZED COSTS S 370 16,284 503 120 826 18,103 153 11,657 926 315 13,051 S 5,052 AT DECEMBER 31, 1996 Unproved properties Proved properties and related produdng assets Support equipment Deferred exploratory wells Other uncompleted projects GROSS CAPITALIZED COSTS $ 301 16,284 525 157 446 17,713 Unproved properties valuation 150 Proved produdng properties Depredation and depletion Future abandonment and restoration Support equipment depredation 11,422 996 310 Accumulated provisions NET CAPITALIZED COSTS 12,878 S 4,835 AT DECEMBER 31, 1995 Unproved properties Proved properties and related produdng assets Support equipment Deferred exploratory wells Other uncompleted projects GROSS CAPITALIZED COSTS Unproved properties valuation Proved produdng properties - Depredation and depletion Future abandonment and restoration Support equipment depredation Accumulated provisions NET CAPITALIZED COSTS $ 329 16,261 686 148 368 17,792 213 11,282 1,062 384 12,941 $ 4,851 $ 58 3,303 209 46 549 4,165 42 1,459 304 79 1,884 $2,281 $ 59 2,753 158 43 678 3,691 37 1,240 272 75 1,624 $ 2,067 S 57 1,959 138 40 1,010 3,204 30 1,071 247 64 1,412 $ 1,792 $ 236 5,644 310 58 821 7,069 98 2,521 177 130 2,926 $4,143 $ 208 4,267 254 94 1,520 6,343 86 2,259 160 137 2,642 $ 3,701 $ 190 5,334 295 62 1,176 7,057 95 3,119 291 179 3,684 $ 3,373 $ 664 25,231 1,022 224 2,196 29,337 293 15,637 1,407 524 17,861 $11,476 $ 568 23,304 937 294 2,644 27,747 273 14,921 1,428 522 17,144 $ 10,603 $ 576 23,554 1,119 250 2,554 28,053 338 15,472 1,600 627 18,037 S 10,016 Affiliated Companies CPI TC0 $ 1,112 578 338 2,028 - $ 378 491 209 - 153 1,231 - 626 44 343 1,013 $1,015 51 6 53 110 $1,121 $ 1,018 548 293 1,859 - $ 420 524 200 97 1,241 - 557 37 309 903 $ 956 34 4 46 84 $ 1,157 $ 900 494 320 1,714 - $ 420 408 207 112 1,147 - 492 24 277 793 $ 921 18 2 30 50 $ 1,097 Worldwide $ 1,042 26,834 1,809 224 2,687 32,596 293 16,314 1,457 920 18,984 $13,612 $ 988 24,846 1,685 294 3,034 30,847 273 15,512 1,469 877 18,131 $ 12,716 $ 996 24,862 1,820 250 2,986 30,914 338 15,982 1,626 934 18,880 $ 12,034 TABLE III - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES1 The company's results of operations from oil and gas pro ducing activities for the years 1997, 1996 and 1995 are shown in the following table. Net income from exploration and production activities as reported on Page 32 reflects income taxes computed on an effective rate basis. In accordance with SFAS No. 69, income taxes in Table 111 are based on statutory tax rates, reflecting allowable deductions and tax credits. Interest expense is excluded from the results reported in Table III and from the net income amounts on Page 32. CHEVBB 0002764 CHEVRON CORPORATION 1997 ANNUAL REPORT Supplemental Information on Oil and Gas Producing Activities - Continued Unaudited TABLE III - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES1 - Continued Millions of dollars Consolidated Companies U.S. Africa Other Total Affiliated Companies CPI TCO YEAR ENDED DECEMBER 31,1997 Revenues from net production Sales Transfers Total Production expenses $ 1,931 1,799 3,730 (1,272) Proved producing properties depreciation, depletion and abandonment provision Exploration expenses Unproved properties valuation Other income (expense)2 (737) (227) (16) 87 Results before income taxes Income tax expense Results of Producing Operations 1,565 (555) S 1,010 YEAR ENDED DECEMBER 31,1996 Revenues from net production Sales Transfers S 1,695 2,073 Total 3,768 Production expenses (1,252) Proved producing properties depreciation. depletion and abandonment provision Exploration expenses (678) (172) Unproved properties valuation Other income (expense)2 (12) 46 Results before income taxes Income tax expense 1,700 (600) Results of Producing Operations $ 1,100 YEAR ENDED DECEMBER 31, 1995 Revenues from net production Sales Transfers Total Production expenses $ 1,189 1,689 2,878 (1,196) Proved producing properties depredation, depletion and abandonment provision Exploration expenses Unproved properties valuation New accounting standard for impaired assets Other income (expense)2 (752) (102) (18) (753) 130 Results before income taxes Income tax expense 187 (61) Results of Produring Operations $ 126 $1,782 273 2,055 (297) $ 899 656 1,555 (278) $ 4,612 2,728 7,340 (1,847) $ 43 634 677 (246) $ 283 - 283 (79) (256) (66) (7) (46) 1,383 (939) $ 444 (311) (200) (10) 196 952 (365) S 587 (1,304) (493) (33) 237 3,900 (1,859) S 2,041 (81) (16) " 10 344 (173) $ 171 (37) - (13) 154 (46) $ 108 $ 975 1,181 2,156 (242) $ 984 756 1,740 (342) J 3,654 4,010 7,664 (1,836) $ 45 648 693 (213) $ 256 - 256 (97) (194) (85) (6) (74) 1,555 (1,059) $ 496 (296) (198) (8) 112 1,008 (471) $ 537 (1,168) (455) (26) 84 4,263 (2,130) $ 2,133 (80) (8) 8 400 (212) $ 188 (34) - (13) 112 (34) $ 78 S 748 824 1,572 (190) $ 783 662 1,445 (400) S 2,720 3,175 5,895 (1,786) $ 35 583 618 (195) $ 125 - 125 (94) (174) . (316) (57) (213) (7) (11) - (128) (52) 37 1,092 414 (660) (246) $ 432 $ 168 (1,242) (372) (36) (881) 115 1,693 ' (967) $ 726 (69) (9) - (13) 332 (176) $ 156 (26) - 5 (4) $1 Worldwide S 4,938 3,362 8,300 (2,172) (1,422) (509) (33) 234 4,398 (2,078) $ 2,320 $ 3,955 4,658 8,613 (2,146) (1,282) (463) (26) 79 4,775 (2,376) $ 2,399 $ 2,880 3,758 6,638 (2,075) (1,337) (381) (36) (881) 102 2,030 (1,147) $ 883 lThe value of owned production consumed as fuel has been eliminated from revenues and production expenses, and the related volumes have been deducted from net production in calculating the unit average sales price and production cost; this has no effect on the amount of results of producing operations, includes gas processingfees, net sulfur income, natural gas contract settlements, currency transaction gains and losses, miscellaneous expenses, etc. Also includes net income from related oil and gas activities that do not have oil and gas reserves attributed to them (e.g., equity eamings of NCC Corporation, net income from technical and operating service agreements). In 1997, the United States includes $290 before-tax gains on sales of producing properties partially offset by a $54 provision for the write-down of assets and restructuring costs in NCC Corporation. "Other international' includes $71 before-tax gains from the sale of 10 percent of Chevron's interest in TCO and S18 for the sale of producing properties. In 1996, in the United Slates, a $48 before-tax gainfrom the merger of the companyS natural gas liquids company and natural gas marheting business with NCC Corporation and a $19 refund offederal lease costs were more than offset by litigation, environmental and impairment provisions totaling $78 and a loss of $17 on the sale of a producing property. "Other international" in 1996 includes $103 of gains on sales of producing properties, partially offset by $33 of asset impair ments and employee severance provisions. In 1995, before-lax net asset write-offs, asset dispositions, environmental provisions and regulatory issues increased income $15 in the United States. However; in the "Other international' segment, net special charges for litigation and employee severance reduced eamings $29. 58 CHEV BB 3002765 TABLE III - RESULTS OF OPERATIONS FOR OIL AND GAS PRODUCING ACTIVITIES1'2 - Continued Per-unit Average Sales Price and Production Cost1,2 Consolidated Companies Affiliated Companies U.S. Africa Other Total CPI TCO Worldwide YEAR ENDED DECEMBER 31, 1997 Average sales prices Liquids, per barrel Natural gas, per thousand cubic feet Average production costs, per barrel $17.33 2.42 5.47 $18.15 - 2.61 $16.88 2.35 2.89 $17.53 $ 15.35 2.40 - 4.17 5.59 $10.69 .51 2.78 $16.82 2.35 4.22 YEAR ENDED DECEMBER 31,1996 Average sales prices Liquids, per barrel Natural gas, per thousand cubic feet Average production costs, per barrel YEAR ENDED DECEMBER 31, 1995 Average sales prices Liquids, per barrel Natural gas, per thousand cubic feet Average production costs, per barrel' $ 18.41 2.29 5.40 $20.41 - 2.29 $ 18.50 2.08 3.31 $ 19.12 2.25 4.16 $ 16.26 - 4.99 $ 12.27 .57 4.15 $ 18.42 2.21 4.23 $ 14.98 1.52 5.11 $16.49 - 2.00 $ 15.32 1.72 3.83 $ 15.55 1.56 4.12 $ 14.35 - 4.52 $ 11.51 .71 7.73 $ 15.29 1.55 4.24 Average sales price for liquids ($/Bbl) DECEMBER 1997 December 1996 December 1995 $15.63 21.07 15.47 $15.60 23.54 17.45 $15.09 19.45 16.03 $15.48 S 14.16 21.54 19.06 16.25 15.39 $ 9.40. 13.64 11.37 $14.91 20.68 16.01 Average sales price for natural gas (S/MCF) DECEMBER 1997 December 1996 December 1995 $ 2.25 $ 3.73 2.04. - -$ 2.76 - 2.24 *-- 1.99 $ 2.31 3.42 2.03 $ $ .63 - .81 .77 $ 2.26 . 3.36 2.02 `The value of owned production consumed as fuel has been eliminated from revenues and production expenses, and the related volumes have been deducted from net production in calculating the unit average sales price and production cost; this has no effect on the amount of results ofproducing operations. Natural gas converted to crude oil equivalent gas (OEG) barrels at a rate of 6 MCFi OEG barrel. TABLE IV - RESERVE QUANTITIES INFORMATION The company's estimated net proved underground oil and gas reserves and changes thereto for the years 1997,1996 and 1995 are shown in the following table. Proved reserves are estimated by the company's asset teams composed of earth scientists and reservoir engineers. These proved reserve estimates are reviewed annually by the corpora tion's reserves advisory committee to ensure that rigorous professional standards and the reserves definitions pre scribed by the Securities and Exchange Commission are consistently applied throughout the company. Proved reserves are the estimated quantities that geo logic and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating condi tions. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of underground reserves are subject to change over time as additional information becomes available. Proved reserves do not include additional quantities recoverable beyond the term of the lease or contract unless renewal is reasonably certain, or that may result from extensions of currently proved areas, or from application of secondary or tertiary recovery processes not yet tested and determined to be economic. Proved developed reserves are the quantities expected to be recovered through existing wells with existing equip ment and operating methods. "Net" reserves exclude royalties and interests owned by others and reflect contractual arrangements and royalty obligations in effect at the time of the estimate. Proved reserves for Tengizchevroil (TCO), the compa ny's affiliate in Kazakhstan, do not include reserves that will be produced when a dedicated export system is in place. In April 1997, Chevron sold 10 percent of its interest in TCO, reducing its ownership to 45 percent. Injune 1997, a consortium, which Chevron will lead and have a 30 percent interest in, was successful in its bid to operate, under a risked service agreement, Venezuela's block LL-652, located in the northeast section of Lake Mara caibo. With an extensive operating program, the company plans to increase production to 115,000 barrels per day from a baseline production rate of 10,000 barrels per day. Chevron is accounting for LL-652 as an oil and gas activity and has recorded 49 million barrels of proved crude oil reserves. No reserve quantities have been record ed for the company's Boscan service agreement, which began in 1996. CHEV BB 0002766 59 lUnruKAt suh 1497 ANNUAL ftPORT Supplemental Information on Oil and Gas Producing Activities -- Continued' Unaudited TABLE IV - RESERVE QUANTITIES INFORMATION -Continued NET PROVED RESERVES OF CRUDE OIL, CONDENSATE AND NATURAL GAS UOUIDSMillions of barrels Consolidated Companies Affiliates U.S. Africa Other Total CPI TC0 wide NET PROVED RESERVES OF NATURAL GAS _______ __________________________Billions of cubic feet Consolidated Companies Affiliates U.3" Africa Other Total CPI TC0 wide RESERVES AT JANUARY 1, 1995 Changes attributable to: Revisions Improved recovery Extensions and discoveries Purchases1 Sales2 Production RESERVES AT DECEMBER 31, 1995 Changes attributable to: Revisions Improved recovery Extensions and discoveries Purchases1 Sales2 Production RESERVES AT DECEMBER 31,1996 Changes attributable to: Revisions Improved recovery Extensions and discoveries Purchases1 Sales2 Production RESERVES AT DECEMBER 31,1997 1,200 804 25 62 7 36 87 3 (6) (129) 137 25 - (95) 1,187 969 (9) 73 38 22 63 2 (7) (125) 74 - (106) 1,149 1,032 8 (16) 139 72 57 - (32) (125) 156 - - (113) 1,196 1,131 Developed reserves At January 1, 1995 1,097 546 At December 31,1995 1,061 596 At December 31,1996 1,027 AT DECEMBER 31, 1997 1,025 658 721 465 2,469 603 1,095 4,167 5,576 74 161 (28) 66 109 42 14 238 - 28 (5) (11) - (76) (300) (55) 2 135 - 151 3 7 - 238 609 - 28 48 - (11) (29) (10) (365) (682) 538 2,694 562 1,087 4,343 5,532 24 88 (4) 69 153 (225) 22 82 60 - 142 20 6 143 2 - 2(32) (39) (76) (307) (54) 145 676 -25 - (39) (47) (21) (382). (686) 482 2,663 566 1,135 4,364 5,275 38 30 37 7 218 27 92 159 (98) - 245 111 14 51 (1) (72) 227 51 (33) (310) 4 - (56) (120) (25) 231 51 (153) (391) 470 3 (95) (675) 519 2,846 578 1,082 4,506 4,991 293 1,936 499 371 2,028 457 281 1,966 448 293 2,039 435 414 2,849 4,919 406 2,891 4,929 500 2,914 4,727 532 3,006 4,39* 2,722 8,298 151 1,518 9,967 62 71 136 13 - 23 30 - 2 - 22 175 806 6 - - 2 50 - - - (23) (52) - - - (176) (858) (15) (15) 151 30 812 50 (52) (888) 84 2,794 8,410 155 1,505 10,070 209 489 473 (1) (18) - 16 36 1 - . 7 683 15 - 11 16 - - - (11) (58) - - (171) (857) (18) (25) 454 37 698 16 (58) (900) 293 3,135 8,703 152 1,462 10,317 (67) - (3) 211 1 12 1 (7) (166) 46 112 482 4 (102) (844) 19 5 2 - (17) 120 - . (156) (25) 185 117 484 4 (258) (886) 223 3,187 8,401 161 1,401 9,963 - 1,508 6,427 135 574 7,136 84 1,726 6,739 140 562 7,441 293 1,634 6,654 136 643 7,433 223 1,695 6,309 145 688 7,142 `includes reserves acquired through property exchanges. 2lncludes reserves disposed of through property exchanges. TABLE V - STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES The standardized measure of discounted future net cash flows, related to the above proved oil and gas reserves, is calculated in accordance with the requirements of SFAS No. 69. Estimated future cash inflows from production are computed by applying year-end prices for oil and gas to year-end quantities of estimated net proved reserves. Future price changes are limited to those provided by con tractual arrangements in existence at the end of each reporting year. Future development and production costs are those estimated future expenditures necessary to develop and produce year-end estimated proved reserves based on year-end cost indices, assuming continuation of year-end economic conditions. Estimated future income taxes are 'alculated by applying appropriate year-end statutory tax ^ These rates reflect allowable deductions and tax and are applied to estimated future pre-tax net cash less the tax basis of related assets. Discounted future net cash flows are calculated using 10 percent midperiod discount factors. This discounting requires a year-by-year estimate of when the future expenditures will be incurred and when the reserves will be produced. The information provided does not represent manage ment's estimate of the company's expected future cash flows or value of proved oil and gas reserves. Estimates of proved reserve quantities are imprecise and change over time as new information becomes available. Moreover, probable and possible reserves, which may become proved in the future, are excluded from the calculations. The arbi trary valuation prescribed under SFAS No. 69 requires assumptions as to the timing and amount of future devel opment and production costs. The calculations are made as of December 31 each year and should not be relied upon as an indication of the company's future cash flows or value of -its oil and gas reserves. CHEV BB 0002767 TABLE V - STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATED TO PROVED OIL AND GAS RESERVES - Continued Millions of dollars Consolidated Companies Affiliated Companies U.S. Africa Other Total CPI TCO Worldwide AT DECEMBER 31, 1997 Future cash inflows from production Future production and development costs Future income taxes Undiscounted future net cash flows 10 percent midyear annual discount for timing of estimated cash flows STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS $ 28,270 (14,030) (4,710) 9,530 (3.910) $ 5,620 $16,560 (4,810) (6,630) 5,120 (1,780) $ 3,340 $16,860 $ 61,690 (5,090) (23,930) (4,330) (15,670) 7,440 22,090 (3,290) (8,980) $ 4,150 $ 13,110 S 9,240 (6,340) (1,390) 1,510 (650) S 860 AT DECEMBER 31, 1996 Future cash inflows from production Future production and development costs Future income taxes Undiscounted future net cash flows 10 percent midyear annual discount for timing of estimated cash flows Standardized Measure of Discounted Future Net Cash Flows S 45,620 (14,430) (11,170) 20,020 $ 24,220 (3,840) (12,560) 7,820 $ 19,560 $ 89,400 (4,590) (5,290) (22,860) (29,020) 9,680 37,520 $ 12,220 (7,560) (2,210) 2,450 (8,250) (2,700) (4,300) (15,250) (1,020) $ 11,770 $ 5,120 $ 5,380 $ 22,270 $ 1,430 AT DECEMBER 31, 1995 Future cash inflows from production Future production and development costs Future income taxes Undiscounted future net cash flows 10 percent midyear annual discount for timing of estimated cash flows Standardized Measure of Discounted Future Net Cash Rows S 30,200 (14,140) (5,390) 10,670 $ 17,570 (4,350) (7,910) 5,310 $ 15,340 $ 63,110 (4,600) (23,090) (3,660) (16,960) 7,080 23,060 $ 9,530 (5,700) (1,950) 1,880 (4,260) (1,830) (3,140) (9,230) (800) S 6,410 $ 3,480 $ 3,940 $ 13,830 $ 1,080 $10,890 (6,550) (600) 3,740 (2,710) $ 1,030 $ 16,040 (5,330) (4,220) 6,490 (5,070) $ 1,420 $ 15,630 (7,140) (3,350) 5,140 (3,700) $ 1,440 $ 81,820 (36,820) (17,660) 27,340 (12,340) $ 15,000 $ 117,660 (35,750) (35,450) 46,460 (21,340) $ 25,120 $ 88,270 (35,930) (22,260) 30,080 (13,730) $ 16,350 TABLE VI - CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES Millions of dollars Consolidated Companies 1997 1996 1995 _______ Affiliated Companies 1997 1996 1995 Worldwide 1997 1996 1995 PRESENT VALUE AT JANUARY 1 $22,270 $13,830 $9,720 $2,850 $2,520 $1,900 $25,120 $16,350 $11,620 Sales and transfers of oil and gas produced, net of production costs (5,493) (5,828) (4,109) (635) Development costs incurred Purchases of reserves Sales of reserves 1,908 173 (238) 1,662 28 (353) 1,661 230 (116) 311 - (140) Extensions, discoveries and improved recovery, less related costs 2,161 Revisions of previous quantity estimates 535 3,745 969 2,927 1,979 104 980 Net changes in prices, development and production costs (20,440) 13,495 3,602 (3,570) Accretion of discount Net change in income tax 3,673 8,561 2,236 1,513 516 (7,514) (3,577) 1,474 Net change for the year (9,160) 8,440 4,110 (960) PRESENT VALUE AT DECEMBER 31 $13,110 $22,270 $13,830 $1,890 (639) 173 - - 316 59 721 418 (718) 330 $2,850 (454) 104 - (6,128) 2,219 173 (378) (6,467) 1,835 28 (353) 165 (723) 2,265 1,515 4,061 1,028 1,756 (24,010) 14,216 310 4,189 2,654 (538) 10,035 (8,232) 620 (10,120) 8,770 $2,520 $15,000 $25,120 (4,563) 1,765 230 (116) 3,092 1,256 5,358 1,823 (4,115) 4,730 $16,350 The changes in present values between years, which can be significant, reflect changes in estimated proved reserve quantities and prices and assumptions used in forecasting production volumes and costs. Changes in the timing of production are included with "Revisions of previous quan tity estimates." CHEV BB 0002768 CttfcVtOH COItfOUATIOH 199? ANNUM. 1mT Eleven-Year Financial Summary1 Millions of dollars, except per-share amounts CONSOLIDATED STATEMENT OF INCOME DATA REVENUES Sales and other operating revenues Refined products Crude oil Natural gas Natural gas liquids Other petroleum - Chemicals Coal and other minerals Excise taxes Corporate and other Total sales and other operating revenues Income from equity affiliates Other income TOTAL REVENUES COSTS, OTHER DEDUCTIONS AND INCOME TAXES INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES NET INCOME PER SHARE OF COMMON STOCK: INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES - BASIC - DILUTED CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES NET INCOME PER SHARE OF COMMON STOCK - BASIC -DILUTED CASH DIVIDENDS PER SHARE CONSOLIDATED BALANCE SHEET DATA (YEAR-END) Current assets Properties, plant and equipment (net) Total assets Short-term debt Other current liabilities Long-term debt and capital lease obligations Stockholders' equity Per share SELECTED DATA Return on average stockholders' equity Return on average capital employed Total debt/total debt plus equity Capital and exploratory expenditures2,3 Common stock price - High - Low - Year-end Common shares outstanding at year-end (in thousands) Weighted average shares outstanding for the year (in thousands) Number of employees at year-end4 1997 1996 1995 $15,584 11,297 2,568 553 1,109 3,520 369 5,574 9 40,583 688 679 41,950 38,694 $ 3,256 - $ 3,256 $15,785 12,397 3,299 1,167 1,184 3,422 340 5,202 (14) 42,782 767 344 43,893 41,286 $ 2,607 - $ 2,607 $13,471 9,376 2,019 1,285 1,144 3,758 358 4,988 (89) 36,310 553 219 37,082 36,152 $ 930 - $ 930 $4.97 $4.95 $4.97 $4.95 $2.28 $ 7,006 22,671 35,473 1,637 5,309 4,431 17,472 $ 26.64 19.7% 15.0% 25.8% $ 5,541 $893/i6 $613A $77 655,931 654,991 39,362 $3.99 $3.98 $3.99 $3.98 $2.08 $ 7,942 21,496 34,854 2,706 6,201 3,988 15,623 $ 23.92 17.4% 12.7% 30.0% $ 4,840 $68Vs $51 $65 653,086 652,769 40,820 $1.43 $1.43 $1.43 $1.43 $1,925 $ 7,867 21,696 34,330 3,806 5,639 4,521 14,355 $ 22.01 6.4% 5.3% 36.7% $ 4,800 $53Vs $433/s $523/s 652,327 652,084 43,019 'Comparability between years is affected by changes in accounting method^: 1997, 1996 and 1995 reflect adoption of Statement of Financial Accounting Standards CSFAS) No. 122, "Accountingfor the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'; 1992 and subsequent years reflect adoption of SPAS No. 106, "Employers' Accounting for Postretiremen! Benefits Other Than Pensions," and SFA5 No. 109, "Accounting for Income Taxes"; 1987 through 1991 reflect the adoption of SFAS No. 96,"Accounting for Income Taxes"; 1987 and subsequent years reflect adoption of SFAS No. 87, `Employers' Accountingfor Pen sions, ' and SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Pension Plans andfor Termination Benefits. ' Share and per-share amounts for all years reflect the two-for-one stock split in May 1994. 2lncludes equity in affiliates' expenditures. $1,174 S983 S912 1Includes $2,522 acquisition of Gulf of Mexico properties from Tenneco Inc. in 1988. 'includes service station personnel. nn L-ttlL V DD 62 3002769 1994 1993 1992 1991 1990 1989 1988 1987 $14,328 8,249 2,138 1,180 944 3,065 416 4,790 20 35,130 , 440 284 35,854 34,161 $ 1,693 - $ 1,693 $16,089 8,501 2,156 1,235 967 2,708 447 4,068 20 36,191 440 451 37,082 35,817 $ 1,265 - $ 1,265 $ 16,821 10,031 1,995 1,190 927 2,872 397 3,964 15 38,212 406 1,059 39,677 37,467 ~ $16,794 10,276 1,869 1,165 812 3,098 427 3,659 18 38,118 491 334 38,943 37,650 $ 2,210 (641) $ 1,569 $ 1,293 - $ 1,293 $19,385 11,303 2,056 1,305 769 3,325 443 2,933 21 41,540 371 655 42,566 40,409 $ 2,157 - $ 2,157 $15,682 6,791 1,693 937 719 3,048 470 2,473 103 31,916 350 519 32,785 32,534 $ 251 - $ 251 $ 13,707 5,059 1,389 .875 658 2,960 430 2,526 118 27,722 422 713 28,857 27,089 $ 1,768 - $ 1,768 $ 14,472 5,871 1,312 885 642 2,360 398 2,091 75 28,106 376 638 29,120 27,870 $ 1,250 $ 1,250 $2.60 $2.59 ' $2.60 $2.59 $1.85 $1.94 $1.94 $1.94 $1.94 $1.75 $ 7,591 22,173 34,407 4,014 5,378 4,128 14,596 $ 22.40 $8,682 21,865 34,736 3,456 7,150 4,082 13,997 ' $ 21.49 11.8% 8.7% -35.8% $ 4,819 $493/i6 $397/a $445/s 651,751 651,672 45,758 9.1% 6.8% 35.0% $ 4,440 $493/a $33u/i6 $439/i6 651,478 650,958 47,576 $3.26 $3.26 $(0.95) $2.31 $2.31 $1.65 $1.85 $1.85 $1.85 $1.85 $1,625 $ 8,722 - 22,188 33,970 2,888 6,947 4,953 13,728 $ 21.11 $ 9,031 ' " 22,850 34,636 1,706 7,774 5,991 14,739 $ 21.25 11.0% 8.5% 36.4% $ 4,423 $3711/i6 $307i6 $343A 650,348 677,955 49,245 8.7% 7.5% 34.3% $ 4,787 $407i6 $313A $34Vz 693,444 700,348 55,123 $3.05 $3.05 - $3.05 $3.05 $1,475 $0.37 $0.37 - $0.37 $0.37 $1.40 $10,089 22,726 35,089 59 8,958 6,710 14,836 $ 21.15 $ 8,620 .23,040 33,884 126 7,457 7,390 13,980 $ 19.69 15.0%' 11.9% 31.3% $ 4,269 $4013/i6 $3lVi6 $367i6 701,600 706,926 54,208 1.8% 3.2% 35.0% $ 3,982 $36 $227/a $337/s 710,048 683,778 54,826 $2.59 $2.59 $2.59 $2.59 $1,275 $ 7,941 - 23,798 33,924 ' 469 6,534 6,833 14,744 $ 21.63 . 12.4% 10.1% 33.1% $ 5,853 $257/a $1913/ $227/a 681,750 681,698 53,675 $1.83 $1.83 $1.83 $1.83. $1.20 $ 9,515 21,736 34,057 915 7,517 6,255 13,853 $ 20.32 9.2% 7.8% 34.1% $ 2,841 $325A $16 S1913/i6 681,646 681,636 51,697 CHEV BB 0002770 S846 i701 S621 $498 $433 $389 $337 $304 63 CHEVRON CORPORATION 1997 ANNUAL REPORT Eleven-Year Operating Summary WORLDWIDE - INCLUDES EQUITY IN AFFILIATES1 Thousands of barrels per day, except natural gas data is millions of cubic feet per day 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988 1987 UNITED STATES Gross production of crude oil and natural gas liquids Net production of crude oil and natural gas liquids Refinery input Sales of refined products Sales of natural gas liquids Total sales of petroleum products Gross production of natural gas Net production of natural gas Sales of natural gas 388 385 397 418 447 488 516 524 552 553 580 343 341 933 951 1,193 1,122 132 187 1,325 . 1,309 2,192 2,216 1,849 1,875 3,389 3,588 350 925 1,117 213 1,330 2,207 1,868 2,815 369 1,213 1,314 215 1,529 2,441 2,085 2,598 394 1,307 1,423 211 1,634 2,407 2,056 2,334 432 1,311 1,470 194 1,664 2,720 2,313 2,539 454 1,278 1,444 175 1,619 2,779 2,359 2,592 458 1,406 1,489 188 1,677 3,131 2,650 2,845 482 1,403 1,469 184 1,653 2,841 2,413 2,657 484 1,407 1,451 180 1,631 2,384 2,024 2,181 507 1,388 1,430 161 1,591 2,290 1,944 2,095 INTERNATIONAL Gross production of crude oil and natural gas liquids Net production of crude oil and natural gas liquids Refinery input Sales of refined products Sales of natural gas liquids Total sales of petroleum products Gross production of natural gas Net production of natural gas. Sales of natural gas 1,037 1,003 944 896 825 791 784 777 756 756 758 731 702 651 624 556 512 504 477 467 486 482 565 537 598 623 598 543 517 494 490 500 490 886 944 969 934 923 859 823 772 740 742 710 43 .36 47 34 37 33 29 33 43 37 34 929 980 1,016 968 960 892 852 805 783 779 744 673 676 652 657 572 541 525 503 382 348 379 576 584 565 546 469 463 447 417 330 300 325 1,141 778 564 461 462 466 444 423 303 274 307 TOTAL WORLDWIDE Gross production of crude oil and natural gas liquids Net production of crude oil and natural gas liquids Refinery input Sales of refined products Sales of natural gas liquids Total sales of petroleum products Gross production of natural gas Net production of natural gas Sales of natural gas 1,425 1,388' 1,341 1,314 1,272 1,279 1,300 1,301 1,308 1,309 1,338 1,074 1,498 2,079 175 2,254 2,865 2,425 4,530 1,043 1,488 2,066 223 2,289 2,892 2,459 4,366 1,001 1,523 2,086 260 2,346 2,859 2,433 3,379 993 1,836 2,248 249 2,497 3,098 2,631 3,059 950 1,905 2,346 248 2,594 2,979 2,525 2,796 944 1,854 2,329 227 2,556 3,261 2,776 3,005 958 1,795 2,267 204 2,471 3,304 2,806 3,036 935 1,900 2,261 221 2,482 3,634 3,067 3,268 949 1,893 2,209 227 2,436 3,223 2,743 2,960 970 1,907 2,193 217 2,410 2,732 2,324 2,455 989 1,878 2,140 195 2,335 2,669 2,269 2,402 WORLDWIDE - EXCLUDES EQUITY IN AFFILIATES Number of wells completed (net)2 Oil and gas 779 710 455 364 422 342 607 543 306 415 340 Dry 45 62 64 70 76 33 69 79 71 77 44 Producing oil and gas wells (net)2 12,724 13,114 11,707 12,111 10,996 10,773 15,502 17,890 21,695 24,802 27,209 `Gross production represents the companyS share of local production before deducting lessors' royalties. Net production is gross production minus royalties paid to lessors. 2Nct wells include all those wholly owned and the sum offractional interests in those that are joint ventures, unit operations or similar wells. Wells shut in are excluded. Beginning in 1994, producing wells include injection wells temporarily functioning as producing wells. CHEVBB 0002771 64 CHEVRON CORPORATION 1997 ANNUAL REPORT Board of Directors Kenneth T. Derr, 61, has been Chairman of the Board and Chief Executive Officer since 1989. He joined the corporation in 1960. He was elected a Vice President in 1972, a Director in 1981 and Vice Chairman in 1985. He also is a Director of AT&T Corp., Citicorp and Potlatch Corporation. (2) Jemee N. Sullivan, 60, is Vice Chair man responsible for worldwide refining, marketing, chemicals and coal mining operations. He joined the corporation in 1961. He was elected a Vice President in 1983, a Director in 1988 and Vice Chairman in 1989. He also is a Director of Weyerhaeuser Company. Samoal H. Armacoat, 58, has been a Director since 1982. He is a Manag ing Director of Weiss, Peck & Greer lLc.. an investment firm. He also is a Director of SRI International; The Fail ure Group, Inc.; the James Irvine Foundation; and Scios, Inc. (3,4) Sam Ginn, 60. was elected a Director in 1989. He is Chairman of the Board and Chief Executive Officer (CEO) of AirTouch Communications. Inc. Previ ously he was Chairman of the Board and CEO of Pacific Telesis Group. He also is a Director of Hewlett-Packard Company. Transamenca Corporation and Safewav Inc. (1,3) Carla A. Hills, 64, was elected a Direc tor in 1993. She is Chairman and Chief Executive Officer of Hills & Company International Consultants. She served as VS. Trade Representative 1989-1993. She is a Director of American International Group, Inc.; Lucent Technologies Inc.; Bechtel Enterprises; Time Warner Inc.; and Trust Company of the West. (2,4) J. Bennett Johnston, 65, was elected a Director in 1997. He is Chief Executive Officer ofJohnston & Associates, a con sulting firm. He served as a Senator from Louisiana for 24 years. He is a Director of URS Corporation, Columbia Energy Group and Freeport-McMoran Copper & Gold Inc. (1,2) Richard H. Matzka, 61, was elected a Director in 1997. He has been a Corporate Vice President since 1990 and President, Chevron Overseas Petroleum, since 1989. Previously he was Vice President, Chevron Chemi cal Company, and President. Chevron Canada Resources. He joined Chev ron in 1961. Charles M. Pigott, 68. has been a Director since 1973. He is Chairman Ementus and a Director of PACCAR Inc, manufacturer of transportation equipment. He also is a Director of The Boeing Company and Seattle Times Company. (3,4) Condolaaaza Rica, 43, was elected a Director in 1991. She is Provost and Vice President of Stanford University. From 1989 to 1991, she served on the National Security Council as Senior Director for Soviet Affairs. She is a Direc tor of Transamenca Corporation. (2, 4) Frank A. Shrontz, 66, was elected a Director in 1996. Previously he was Chief Executive Officer and President of The Boeing Company He served as Assistant Secretary of Defense and Assistant Secretary of the Air Force. He also is a Director of Boise Cascade Cor poration. Citicorp, and Minnesota Min ing and Manufactunng Company. (1.3) Chong-Un Tian, 62, was elected a Director in 1997. He was Chancellor of the University of California, Berke ley, from 1990 to 1997. He serves on the Board of Trustees of The Asia Foundation. He also is a Director of Raychem Corporation; AirTouch Com munications, Inc.; and Wells Fargo & Company. (1,3) Georgs H. Weyerhaeuser, 71. has been a Director since 1977. He is Chairman of the Board of Weyerhaeuser Com pany, a forest products company. He also is a Director of The Boeing Com pany and SAFECO Corporation, (2,4) John A. Young, 65, has been a Director since 1985. He is Vice Chairman of the Board of Novell, Inc. Previously he was President. Director and Chief Executive Officer of Hewlett-Packard Company He also is a Director of Lucent Technologies Inc.; Wells Fargo & Company; Shaman Pharmaceuticals, inc.; SmtthKline Beecham PLC; and Affymetnx, Inc. (1,2) Committees of the Board: Cl) Audit: John A. Young, Chairman (3)Board Nominating and Governance: Charles M. Pigott, Chairman (2) Public Policy: Carla A. Hills. Chairman (4)Management Compensation: Samuel H. Armacost, Chairman CHEV BB 0002772 65 Lydia I. Baaba, 45. Corporate Secretary since 1995. Previously Senior Manager, Chevron Tax Department; Manager, Fed eral Tax Legislation; Staff Attorney; and Chevron Legal Representative in Wash ington, D.C. joined Chevron in 1977. Aide M. Caccamo, 60. Vice President. Public Affairs, since 1996. Director of Caltex Petroleum Corporation. Previ ously President, Chevron International Oil Company: General Manager. Market ing, and General Manager, Supply and Distribution. Chevron Products Com pany. Joined Chevron in 1964. Gaorga K. Cartar, 62. Vice President and Treasurer since 1989. Previously Vice President, Finance. Chevron U.S.A., and Comptroller. Chevron Cor poration. Joined Chevron in 1961. Staphan J. Crow*, 50. Comptroller since 1996. Previously Vice President. Finance, Chevron Products Company, and Assistant Comptroller. Chevron Corporation. Joined Chevron in 1972. Uoyd E. Elkins, 54, Corporate Vice President since 1988 and President. Chevron Services Company, since 1993. Director of Caltex Petroleum Corpora tion, ET. Caltex Pacific Indonesia and Amoseas. Previously Vice President, Production, Chevron U.5.A., and Vice President, Production. Chevron Over seas Petroleum. Joined Chevron m 1965. Harvay D. Hinman, 57, Vice President and General Counsel since 1993. Previ ously partner and member of the Execu tive Committee at the law firm of Pillsbury Madison 6r Sutro. Ronald C. Krakis, 49, Corporate Vice President. Previously Vice President. Human Resources, since 1993; Presi dent, Chevron Canada; and Group Manager. Fuels, Chevron Research and Technology Company. Jotned Chevton in 1974. Martin R. Klittan. 53, Vice President and Chief Financial Officer since 1989. Previously President. Chevron Infor mation Technology Company, and Comptroller, Chevron U.S.A. Joined Chevron in 1970. R. Brtics Marsh, 55. General Tax Coun sel since 1994. Previously Assistant Gen eral Tax Counsel. Chevron Corporation; General Tax Counsel, Chevron U.S.A.; and General Tax Manager, Gulf Oil Cor poration. Joined Gulf Oil Corporation m 1971. Gregory Matiufc, 52, Vice President, Human Resources and Quality, since February 1998. Previously Vice Presi dent, Strategic Planning and Quality; Manager, Strategic Planning. Chevron Corporation; Vice President and Gen eral Manager, Western Business Unit, Chevron U.S.A. Production Company Joined Chevron in 1967. David J. O'Railly. 51. Corporate Vice President since 1991tend President. Chevron Products Company, since 1994. Previously Director of Caltex Petroleum Corporation; Corporate Vice President. Strategic Planning and Qual ity; Senior Vice President and Chief Operating Officer. Chevron Chemical Company. Joined Chevron in 1968. Donald L. Paul, 51, Vice President, Technology and Environmental Affairs, since 1996. Director of NGC Corpora tion. Previously President. Chevron Canada Resources, and President, Chevron Petroleum Technology Com pany. Joined Chevron m 1975. John E.' Pappsrcorn, 60, Corporate Vice President since 1990 and President. Chevron Chemical Company, since 1989. Previously Senior Vice President and Vice President, Industrial Chemi cals, Chevron Chemical Company. Joined Gulf Oil Corporation in 1961. P*t*r J. Robartton, 51. Corporate Vice President and President, Chevron U.S.A. Production Company, responsible for all North American exploration and pro duction, since 1997. Director of NGC Corporation. Previously Corporate Vice President. Strategic Planning and Qual ity. and President. WarTen Petroleum Company, Joined Chevron in 1973. John S. Watson, 41. Vice President. Strategic Planning, since February 1998. Previously President, Chevron Canada Limned; General Manager. Strategic Planning and Quality, and Manager, Credit Card Enterprises, Chevron Prod ucts Company Joined Chevron m 1980. Executive Committee: Kenneth T. Derr. James N. Sullivan, Harvey D. Hinman. Martin R. Klitten. Richard H, Matzke. DavidJ. O'Reilly. John E. Pepper corn and Peter J. Robertson. Lvdia t. Beebe. Secretary. CHEVBB 9002773 66 CHEVRON CORPORATION 1997 ANNUAL REPORT Stockholder and Investor Information Stock Exchange Listing Chevron common stock is listed or. the New York, Chicago, Pacific, London and Swiss stock exchanges. On U.S. ex changes, the symbol "CHV" is usejdj. In newspapers, the stock is listed as "Chev ron," "Chevm" or a similar variation. Stockholder Information Stockholders with inquiries about stock ownership, changes of address or d vidend payments may contact: Chevron Corporation Transfer Qf 'ice 575 Market Street, Room 2636 San Francisco, CA 94105-2856 1-800-926-7372 After May 18, contact: ChaseMellon Shareholder Services 85 Challenger Road Ridgefield Park, NJ 07660-2108 1-800-368-8357 Dividend Payment Dates Quarterly dividends on common stock are paid, following declaration by the Board of Directors, on or about the : 10th day of March, June, September and December. The annual dividend rate for 1997 was $2.28. The quarterly dividend rate for the first quarter of 1998 is 61 cents a share and will be paid in March. Direct deposit of dividends is available. For information, contact the Transfer JOffice (see above). | jj Dividend Reinvestment Rian ' Chevron's Direct Stock Services program provides an alternative to! traditional methods of purchasing, holding and' selling stock. The program's features include dividend reinvestment, optional cash investment of $50 to, S100,000 a year, automatic stock purchase and safe- keeping of stock certificates. Anyone interested may call 1-800-286-9178. After May 18, contact: ChaseMellon Shareholder Services! 85 Challenger Road j Ridgefield Park, NJ 07660-2108 ; 1-800-368-8357 I Investor Information Securities analysts, portfolio managers and representatives of financial institu tions seeking financial and operating information may contact: Peter Trueblood Manager, Investor Relations 575 Market Street, Room 3444 San Francisco, CA 94105-2856 (415)8^4-5690 " E-mail: pmtr@chevron.com Web Site on Interpet | ChevronS|Web site offers fact. and fig ures about the company and the petro leum industry. The Web site is stocked r / : li ------- if i continually with articles, news releases, speeches, Quarterly earnings i aforma- tion, the quarterly Report to Slochholtlcrs, the Proxy Statement^ and the complete text of this Annual Report. Th( Web sii:e address is: hitp:/Avww.chevroii.com. Publications for Stockholder: The Report to Stockholders, dc ailing the company^ quarterly financial results, is mailed to Stockholders three t mes a year. The pnnual Report, published in March and mailed With the Proxy Stcttc- merit, summarizes the compar y s finari- cial performance in the preceding calen- dar year and provides an oullo ok for the future. I i News by Fax Chevron's quarterly earnings r ews releases, as1 well as o[ tjher news |release; sj*, are available via fax by calling 1-800- 758-5804, txt. 158075. | Annual Meeting The Annual Meeting of stockh alders will be held at 9:30 a.m., Wcdr esday, April 29,1998, at the Orpheuri Theatre in New Orleans, |. | Meeting notice and proxy material are enclosed wph this Annual Rcpc rt. Stock holders are! urged to! study the material and complete the proxy card. For those not attending the Annual Meeting, it is important that this Card be signed and returned as soon as possible so thenshares are represented in the veiling. Copyright 1998 Chevron Corporation. All rights reserved. Additional Information The Supplement to the Annual Report, containing additional financial and operating data, and Form 10-K, pre pared annually for the Securities and Exchange Commission, are available upon written request from the Comp troller's Department, 575 Market Street, Room 3519, San Francisco, CA 941052856, The Supplement is available after April 15; Form ld-K, after March 31. I i. Contributions: Details of the corpora tion's, political contributions in 1997 arc available upon rtquest from the Secretary's Department, 575 Market Street, 38th Floorj San Francisco, CA 94105-2856. Information about the corporation's charitable and educational l : 11 i 1 contributions is available in the second half of the year. .I Registrar Firsjt Trust California l' j j One California Street, Suite 400 San Francisco, CA 94111-5402 ! After play 18, contact: ChaseMellon Shareholder Services 85 Challenger Road Ridgefield Park, Nj 07660-21081 1-8C 0-368-8357 Corporate Headquarters 575 Market Street San Francisco, CA 94105-2856 (415) 894-7700 Legal Notice , As used in this report, the term "Chev ron" and such terms as "the company," "the corporation," "our," "we" and "us" may refer to Chevrpij Corporation^ to one or| more of its consolidated sub sidiaries or to all them taken as a. whok| All of these terms are vised for convenience only and are not intended as a precise description of any of the separate companies, each of which manages its own affairs. CHEV BB 0002774 Chevron Corporation 575 Market Street San Francisco, CA 94105-2856 The language of the environment When Chevron dismantled four oil plat forms offshore Santa Barbara, Calif., it took many steps to protect marine life. X.. - 1. " For example, while work was in progress, killer whale calls were proje^ed to keep underwater creatures out of harm's way. HEVBB 10002775